The Celestial Group of Hain (NASDAQ: HAIN) expects stable sales growth in 2022. However, estimates include sales growth and free cash flow growth from 2023. In my opinion, if management finds more buyers for certain subsidiaries and acquires trending brands, we may see more free cash flow growth through 2031. Even taking into account some supply chain risk and the amount of leverage, the current valuation looks cheap.
The Hain Celestial Group, Inc.
Incorporated in Delaware, The Hain Celestial Group, Inc. primarily sells groceries and snacks, but also offers personal care and tea.
In my opinion, management is really trying to offer a diversified business model in North America and the international market, which will likely help deliver strong net sales and free cash flow margins. Currently, the company sells products through health food distributors, mass market retailers, e-commerce and convenience stores in nearly 80 countries around the world.
Management expects business growth from 2023
In the latest report, management noted that it expects sales growth to be roughly flat for 2022 with a slight reduction in margins. The numbers in 2022 seem stable. However, according to me and other analysts, the best will come from 2023 and 2024.
Estimates include sales growth of -3% in 2022, 6% in 2023 and 5% in 2024. Additionally, with an EBITDA margin of around 14% in 2023 and 2024, analysts estimate that the business will generate significantly more net income and free cash flow. in 2023 and 2024. In my opinion, those who have information on expectations for 2023 and 2024 will most likely be interested in the economic model.
With a successful transformation and changes in brand portfolio, the implied price could be $38
If management is successful in its strategy of exiting some unprofitable investments and reducing unproductive storage units, we could see an increase in free cash flow margins. I also believe that the sale of some subsidiaries will most likely bring in a lot of cash to support more profitable business initiatives.
The Company sold the entities comprising its Tilda operating segment and certain other assets of the Tilda business to the buyer for an aggregate price of $341.8 million.
On June 28, 2019, the Company completed the sale of the remainder of HPPC and Empire Kosher, which included the FreeBird and Empire Kosher businesses. These divestments were undertaken to reduce the complexity of the Company’s operations and simplify the Company’s brand portfolio, in addition to allowing additional flexibility to focus on opportunities for growth and innovation in the Company’s core businesses. , more profitable and faster growing. Collectively, these divestitures have been reported in the aggregate as the Hain Pure Protein Reportable Segment. Source: 10-K
It should also be noted that management has announced its intention to reshape its brand portfolio. In my opinion, if the transformation is successful, from 2023 and 2024 we could see changes in the cash flow statement:
As part of this initiative, the Company reviewed its product portfolio in North America and divided it into “Get Bigger” and “Get Better” brand categories. Source: 10-K
In this scenario, I assumed sales growth of around 1% to 5% from 2024 to 2031 and an EBITDA margin of 12% to 14%. The results include 2031 EBITDA of $402 million and 2031 sales of $2.8 billion.
If we assume the D&A/Sales ratio is roughly constant and a fixed effective tax of 22%, 2031 EBITDA should be $402 million and 2031 EBIAT would be $224 million.
Now, with capital expenditures of approximately $71 and $25 million as well as cautious changes in working capital, free cash flow for 2031 is $294 million. Note that my changes in working capital and capital expenditure numbers are close to numbers reported by management in the past. In the most recent period, capital expenditures were approximately $52 million and changes in working capital were approximately $3 million.
I assumed a decrease in the cost of capital just after 2022, so that the weighted average cost of capital is around 6% to 9% from 2023 to 2030. I also used an exit multiple close to 13x, which is close to the current valuation.
Putting all the numbers together, we would be talking about a total valuation of $3.4 billion and an implied price of $38.
Supply chain risks or lack of demand could push the stock price down to $14
The worst that can happen to the company’s business model is supply chain issues. If management, its contractors, or any part of the distribution channel cannot work efficiently, products may not be delivered on time. As a result, some brands may suffer reputational damage and free cash flow will likely decrease:
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The failure of a raw material supplier, independent contractor or third-party distributor to deliver or perform for us on a timely or cost-effective basis could result in an increase in our operating costs and a decrease in our profit margins, particularly with regard to our products which have a short lifespan. Source: 10-K
Management may not be able to design new products that meet consumer demand. Existing, successful products may also suffer a decline in demand for various reasons that may not be related to HAIN’s business model. If demand for the products decreases, the business may experience a drop in net sales:
Our business is primarily focused on selling organic, natural and “better for you” products which, if consumer demand for these categories were to decline, could harm our business. During an economic downturn, factors such as increased unemployment, lower disposable income and lower consumer confidence could lead to lower demand for our overall product line, particularly for better-for-you products. health at higher prices. Source: 10-K
I checked previous sales growth to understand where worst case scenario revenue growth might fall. In my opinion, in the past, from the year 2000 to 2020, the company’s sales growth did not drop below -15%.
If we assume a terrible year 2023 with sales growth around -15% and sales growth between 5% and -2.5% from 2024 to 2031, 2031 sales could stay close to $2,069 million . With a terrible EBITDA margin of around 10% to 7.5% and an effective tax of 22%, 2031 EBIAT could remain close to $100 million.
If we add conservative depreciation and amortization figures and capital expenditures of approximately $25 million in 2031, the 2031 free cash flow would be $135 million.
With past financial expectations, some shareholders may decide to sell their shares. As a result, I expect a significant increase in the cost of equity, which could lead to a discount of around 12.5% to 10%. Also, with an exit multiple of around 12.5x, the implied market cap would be $14.
Hain Celestial may need cash to fund further acquisitions and further brand development
As of March 31, 2021, the company had $57 million in cash and an asset-to-liability ratio close to 2x. The current amount of goodwill represents almost 38% of the total amount of assets.
With free cash flow in 2031 approaching $300 million and long-term debt of $827 million, I think Hain Celestial may need to raise funds to pay its debts. If management finds buyers for its non-core business, the debt will likely be paid off sooner rather than later.
My best-case scenario would include the sale of some subsidiaries at favorable valuations and successful new acquisitions
In my best-case scenario, I assumed that The Hain Celestial Group will successfully sell a significant number of brands. With enough cash on hand, over the next eight years management will likely be smart enough to acquire other companies at attractive valuations. As a result, future sales growth will be even greater than the target market, and free cash flow margins will also increase.
My DCF model includes a slight decline in sales in 2022 and 2023 and sales growth of 7.5% from 2024 to 2031. Also, with an EBITDA margin of around 15%, 2031 EBITDA would be close to $500 million and free cash flow in 2031 would be close to $400 million.
I have also included a cost of capital of 5%, as I would expect equity demand to reduce the cost of equity. The results include an implied price of $75 and an internal rate of return of almost 25%.
The Hain Celestial Group recently lowered its forecast for the year 2022; however, most analysts believe 2023 and 2024 will be mild. Given the current market valuation, in my opinion, most market participants only care about the year 2022, which in my opinion is not a good idea. In my opinion, if the company’s transformation plans are successful, the valuation could go north. If the company successfully sells some subsidiaries and uses the money to buy “better for you” business models, free cash flow could move north. Even factoring in the risks, right now The Hain Celestial Group looks like a buy.