Fodelia Extensive Report: Profitable growth by reforming the industry

Translation: Original published in Finnish on 12/5/2024 at 08:11 am EET

Fodelia has continued strong organic development while streamlining the Group structure and strategy during 2024. Fodelia’ssolutions, designed with a customer-oriented approach and produced with industrial efficiency, stand out clearly from the competition, which has helped it quickly gain market shares among institutional catering customers. If the market potential of the public sector materializes there would be upside pressure on our current growth forecasts. We raise the recommendation to Buy (was Accumulate) and our target price to EUR 7.2 (was 6.8).

A reformer of the institutional catering market

Fodelia consists of two business areas, of which Feelia’s role in value creation is central due to the unit's strong growth potential and high return on capital (89% of the Group’s operating result). Feelia produces versatile and cost-effective pre-cooked meals with a very long shelf life for professional kitchens. In recent years, Feelia has increased its market share strongly among, e.g., private players in the care and day-care sectors. Oikia, a consumer product manufacturer, includes businesses with profitability closer to the average in the food sector. In practice, Oikia’s result is generated by the company’s snacks business, which plays a significant role as a contract manufacturer for companies in the retail sector, as well as its own brand products. Oikia also includes an online shop of pre-cooked meal products and pita bread manufacturing, the combined result of which we estimates is slightly in the red.

The strategy focuses on competitive Feelia

After sprawling in the past, Fodelia's current strategy emphasizes focusing on the company’s most competitive businesses, especially Feelia. The divestment of the low-profit Perniön Liha in May 2024 improved the Group's return on capital profile but reduced annual revenue by 5.6 MEUR. Feelia’s organic development has been staggering during 2024 (30% growth in January-September), which has been affected by integrating large day-care center chains as the company’s customers at the end of 2023. We expect growth will moderate but remain at double-digit levles in the coming years (2025-26e: 17% and 12%), which is supported by, e.g., HUS customer contract and Feelia’s continuous development to meet new customer needs. The company’s targets for 2028 are ambitious (revenue of 100 MEUR and EBIT around 10%) and could be met in a favorable scenario if the high market potential of the public sector realized quicker than before. With our current forecasts, 2028 revenue is 73 MEUR and EBIT 7.9%.

Strong value creation potential in a large market

In our view, the profitably growing Feelia should be valued at EV/EBIT 15x and Oikia at an industry-typical 10x, which results in a fair valuation level of good EV/EBIT 14x (equivalent to the 2024e level). The 19% earnings growth and around 2% dividend yield we forecast for 2025-26 make the overall expected return attractive and justify the Buy recommendation. If the company reaches its financial targets, the share price could even triple in four years. Due to economic challenges, the public sector is under pressure to switch to new, more efficient food solutions, which should benefit Feelia in the long term. However, public sector decisions are not in the company’s own hands, which partly increases the uncertainty associated with growth forecasts.