Description

Company

Musti Group is the market leader (25% market share) in the growing and resilient Nordic pet care market. The only pan-Nordic omnichannel player with ca. 335 stores, of which 95% are owned and 5% are franchised. 22.2% of sales were online in 2022 with the rest coming through the stores. Approximately half of the sales are generated via selling own & exclusive brands products.

The company is growing inorganically, by acquiring stores (17 in 2022; 26 in 2021) and by building out its own stores and has added 22 stores in 2022 and 23 in 2021. Apart from store opening, Musti is actively promoting its “Loyalty Club” which has ca. 1.5m customers, has a 5Y CAGR of 15.3%, and is adding roughly 60% of all new puppy registries in Sweden (compared to 29% market share). Loyal Club customers generate ca. 65% of Group sales indicating high loyalty to the brand.

Roughly 50% of all sales come from Pet Food, which is a sticky product and doesn’t correlate much with the macro factors. Another 25% comes from sales of cat litter vet services, which also are characterized by repeat purchasing behavior. Musti is also working on own products and exclusive SKUs which constitute 50% of sales. Own and Exclusive products typically have 10-15% higher gross margins compared to global brands. In addition, Musti can further leverage scale in procurement, pricing, and category management.

Geography-wise Musti is most present in Finland and Sweden where they command 31% and 29% market share. In Sweden company is under-represented in large cities hence room for further growth in the country. Norway is the least penetrated country with just 13% market share and 14.4% of Group sales. Finland is the most saturated market where Musti is now focusing on operational and customer experience improvements to increase the share of wallet and win new customers, while Sweden and Norway continue to be growth markets.

The company has been profitable since 2019 (IPO in 2020), generating ~10% EBITA margins (8% EBIT) and ~5-6% NI margins.

Management target

Management targets €500m in revenues by 2024, with EBITA margin (adjusted for intangibles amortization and right-of-use depreciation) of at least 13% with a steadily improving profile. ND/EBITDA < 2.5x and pay a dividend of 60-80% of NI. Revenue targets imply 12.5% growth for the next 2 years and a 3pp increase in EBITA margin.

Our estimates are more conservative, and we doubt the company is able to reach the margin target due to inflation pressures and a slowdown in discretionary spending, which has been visible during 2022 and is still likely to occur in 2023 as well. 2024 so far remains a black box as there are still enough moving parts for European countries.

So far around 1/3^rd of total stores is in the ramping-up phase (we calculate it as # of stores opened in the last 3y), which, as shown below, drags down total performance for the group.

Market

The market was estimated to be worth approximately EUR 3.1 billion (in 2020), with Sweden as the largest market, accounting for approximately EUR 1.3 billion, Finland approximately EUR 1.0 billion, and Norway approximately EUR 0.9 billion.

The “pet parenting” trend, that drives the long-term structural growth of the pet care market remains robust, shifting spending towards higher quality nutrition, a more diverse range of accessories, and wider adoption of services. Trends are similar to most other European countries where pet parents are buying higher-quality, healthy, and ecological food. Due to higher inflation, a switch to private labels is observed, hence benefiting Musti’s undertaking in producing and selling its own-branded food as well. COVID brought the market somewhat forward as more people got themselves a pet due to increased loneliness during lockdowns, but the LT story remains robust driven by the change of generations and their preferences.

Although we are always skeptical of any quantifiable projections done by intelligence agencies, the uptrend in pet ownership is undeniable and the tables below represent our belief in growth.

The above-shown projections indicate the next 3y CAGR for pet food in those countries between 2.7%-5.4% and as much as 4.4-6.9% CAGR for pet products in the same period. On top of that, Denmark is a white space opportunity for Musti considering very similar living standards to Norway/Sweden/Finland, as well as the relative proximity of the market. We cannot exclude that the company will look toward Denmark going forward, although at this point this is not indicated by the company itself.

Forecast & valuation

While Musti’s revenue CAGR for 2017-2022 was at an impressive 18.2%, going forward we believe that 1) Musti will land nearby the targeted “at least 500 mln EUR” revenue by the end of 2024 considering their good market position across both Sweden and Finland, but also plenty of consolidation opportunities in Norway, 2) starting from 2025 the appetite “to grow at any price” may turn to be somewhat lower than before, considering the new interest rates paradigm globally and just for the sake of conservatism as beyond-the-2025 strategy is yet to be released. All this brings us to ~8.2% revenue CAGR for 2022-2027.

With respect to margin improvement, we tend to see this ambition as reasonable (looking at Finland’s example), but not buying blindly the “over 13% EBITA” notion for margins so far. Still, considering the potential for 1) operating leverage while sustaining strong revenue growth rates, 2) improving logistical situations around the globe, 3) improving operating efficiency/utilization of the company’s key logistics hub in Eskilstuna and 4) more and more stores entering the ramped-up phase of operations, we tend to see EBITA margin at the 12.5% level without any improvement or deterioration afterward till 2027.

Looking at the key fundamental metrics like return on capital and growth assumption, coupled with 8.5-9% WACC we tend to see that the fair EV/EBIT stays at roughly 13x. The room for multiple expansion at this point looks limited (considering that 2024E EV/EBIT stays at 13x these days), but the realization of growth opportunities should drive the stock price going forward. Applying that together with the cross-check using the DCF valuation we tend to see ~50% upside from the current stock price level, which looks appealing considering the semi-defensive nature of the pet products retail business and already well-consolidated position in Finland.

Conclusion

The stock has fallen by more than half mostly from multiple contraction and to a lesser extent estimate revisions. Although not dirt cheap, we believe 1. Positioning of the company is strong 2.  Pet industry is highly attractive with LT above GDP growth 3. Musti is operating in well-developed countries with high discretionary income of the company will provide equity holders with above market returns.

Catalyst

N/A