Softer across the board
The Q2 report was softer than we had expected with regard to all key line items, as sales and EBIT were respectively 5% and ~80% below our expectations. The organic growth rate was adversely impacted by the ongoing change in the distribution model and distribution agreement terminations. While we are not necessarily surprised by the discontinuation of certain contracts, we are nevertheless surprised by the timing and magnitude of them. During the conference call, however, the new CEO mentioned a pragmatic approach with respect to the company's licence brand collaborations; while some of the collaborations will be challenged and discontinued, others may be entered into if they are sufficiently profitable. We believe that this is a constructive approach, and one that has not necessarily been framed this way previously.
Adj. EBITA down 15-9%
We cut '25e-'27e sales by 2% and '25e-'27e adj. EBITA by 15-9% on the back of the report. We incorporate lower organic growth due to the ongoing turnaround and a lower production cadence in the production that was impacted by the fire in Spain. Moreover, we trim our gross margin estimates to reflect the operating remedies related to the fire incident in the Spain factory, i.e. the potential for Midsona to utilise third parties to cover the lost production of high-value products. Currently, Midsona has a leverage ratio of ~1.9x. We see a likely path toward 1x by H2'26e, and at that point we would not be surprised if Midsona were to engage in selective M&A.
Implied valuation
Based on our revised estimates, the company is trading at ~9x NTM EV/EBITA, which is 5-10% below current peer multiples. We note that peers, in turn, are trading ~25% below the 10-year historical median of ~14x NTM EV/EBITA.