Description

Intro

I think HAIN is an attractive long investment at this valuation.  HAIN has undergone a significant transformation under CEO Mark Schiller (appointed Nov 2018) and is now a more focused company with better organic growth and margin prospects.  The company recently outlined its Hain 3.0 plan to further optimize the business over the next few years (e.g. divesting lower margin, lower growth businesses and mixing into higher growth businesses/categories).  HAIN reported its 1Q22 recently and was +5% on the news but has since sold off from the high $40s to low $40s as its largest shareholder, Engaged Capital, meaningfully reduced its position.  While it is never ideal to see a large, activist shareholder like Engaged sell, I do not think it is a reflection of HAIN’s fundamentals and prospects over the next few years.  In addition, the recent dislocation has put HAIN’s valuation more in-line with packaged food peers despite better organic growth, categories and capital allocation opportunities.  The stock is trading at 13.9x FY2 EV/EBITDA compared to packaged food peers at 13.4x FY2 EV/EBITDA.

Key Points

1. HAIN’s valuation is roughly in-line with packaged food peers despite better organic growth (categories and businesses) and capital allocation prospects.

2. HAIN’s portfolio will continue to be streamlined in the next 2-3 years with the likely monetization of its Personal Care business and roll off/sale of its Simplify business (~8% of revenue).  Pro forma, growth businesses will account for 80-85% of total revenue.

3. HAIN has aggressively monetized subscale brands - since Nov 2018, the company has sold 23 brands generating an aggregate ~$1 bn revenue and under $20 mm EBITDA.  The company is simplifying to accelerate growth and profitability.

4. HAIN has flexibility with its capital structure with net leverage at 1.3x last quarter.  Pro forma 2.2x for recent acquisition and share repurchase associated with the Engaged Capital sale.  Target net leverage is 3-4x.

5. HAIN is targeting +6-9% sales growth and +8-11% EBITDA growth by FY25.  This will require some portfolio reshaping so is not necessarily a base case but consensus estimates are below in any case with sales growth in the +4-5% range through FY25.  The management team has executed well since Nov 2018 so delivering on these targets would drive upside to consensus estimates.

6. HAIN could be an acquisition target in the next few years as its portfolio becomes more focused on health/wellness and organic food (i.e. post Personal Care and Simplify changes).  There were rumors a few years ago but HAIN’s complex and fragmented portfolio were sticking points.

Business

HAIN has reshaped its portfolio in the last few years to focus on higher growth categories and businesses.  It has exited subscale brands rolled up under the prior CEO that added little incremental value but drove significant business complexity and inefficiency (e.g. underutilized plants).  As seen below, HAIN has organized its business into four focus areas: 1, turbocharge growth, 2, targeted investment, 3, fuel, and 4, simplify.  The Hain 2.0 transformation obscured measured channel growth rates in IRI/Nielsen because of SKU and brand rationalizations but HAIN is now through the heaviest lifting and measured channel trends are starting to reflect underlying growth.  The company will continue to reshape its portfolio with a Personal Care sale and Simplify monetization/roll off most likely.  Mark Schiller has made clear Personal Care is a good business but does not below within the HAIN portfolio.  Personal Care is ~10% of revenue.  The Simplify brands are ~8% of revenue and have been a significant revenue growth/margin drag (gross margins -500-700s bps below corporate average).  HAIN can probably sell 50% of this business while the other 50% will just roll off over time.

HAIN and industry peers are navigating challenging operating conditions with record cost inflation and supply disruptions affecting the business.  Input cost inflation continues to increase but HAIN is now ~90% covered on commodities (raw materials, packaging) for the year.  Energy and freight are still challenging and driving incremental cost pressures.  The company is responding with aggressive pricing in the US and Europe.  It has successfully achieved its first round of pricing and is working on a second round given incremental cost pressure.  Pricing is never easy but unprecedented inflation and pricing by peers has made it relatively easier.  HAIN’s customers also skew higher income given natural and organic products so in theory should be less sensitive to incremental pricing.

Valuation

HAIN is trading at 13.9x FY23 EV/EBITDA.  This is roughly in-line with packaged food peers.  Other higher growth, better for you companies such as SMPL and BRBR are trading in the mid to high teens EV/EBITDA.  I think HAIN can start to re-rate as investors get comfortable with Engaged Capital’s motivations for selling not being related to fundamentals/HAIN prospects.  Executing on its Hain 3.0 plan to drive better organic rev growth and flow through to EBITDA will also help the multiple.  The company has capital allocation optionality as it monetizes non-core businesses and acquires/mixes up to better growth and margin businesses.  It recently announced the acquisition of ParmCrisps for $259 mm or 2x EV/rev and ~13.5x EV/EBITDA.  This business should be able to grow 15-20% over time as there are significant opportunities to drive better ACV distribution and average items per store (~2% household penetration).  At 20% revenue growth, the acquired asset would contribute ~1% point to total HAIN revenue growth.  The Personal Care business should have a strong FY2H this year and I would suspect management makes a more concerted effort to monetize off that base.  In addition to the multiple re-rating and capital allocation opportunities, there is potential upside to consensus estimates.  Sell side is below management’s Hain 3.0 algorithm through FY25 which is understandable given lack of visibility and portfolio reshaping needed.  If management delivers, HAIN could potentially re-rate on higher estimates.

Event Path

In the short term, executing on FY22 guidance given cost inflation pressures and needed pricing will be key.  The company is in the process of negotiating its second round of pricing due to incremental inflation.  Further portfolio reshaping through Personal Care, Simplify and additional M&A will be the next drivers of the business/valuation.

Risks

Cost inflation.

Supply chain/logistics disruption.

Poor capital allocation.

Catalyst

Quarterly execution in FY22.

M&A - Personal Care, Simplify and integration recent acquisition.