De’Longhi SpA: Rigor and discipline are the key words

De’Longhi SpA: Rigor and discipline are the key words
De’Longhi SpA: Rigor and discipline are the key words

The Italian group was recently integrated into our Europa One fund.

The company based in the charming town of Treviso began a diversification several years ago. Coffee and its machines still represent about 60% of turnover (50% for domestic coffee and 10% for professional coffee) while the ranges of food preparation appliances are now responsible for a quarter of revenues. Finally, the comfort division stagnates at around 7% of revenues.

In terms of figures, all the lights are green. The group is targeting revenue growth of between 9 and 11% for this year and “mid single digit” organic growth in the medium term, i.e. a range of mid-single digits. A long-term investor will be satisfied with this, especially since historically, annual internal growth has reached 6%.

To achieve this, De’Longhi has many assets to bring to bear. Domestic coffee benefits from a favourable product mix and well-established brands, while professional coffee is also performing well, partly thanks to the recent acquisition of the high-end machine brand, La Marzocco, which achieved a turnover of €21 million in the first quarter alone.

Good news also comes from the kitchen appliances segment, which benefits from excellent positioning and should continue to capture the strong demand for blenders (Nutribullet brand, whose margins exceed 20%). In this area, De’Longhi is also taking advantage of its strong capacity for innovation to attract customers (we are thinking in particular of Kenwood cooking robots).

Finally, the group will be able to take advantage of its strong balance sheet to continue its strategic acquisitions since the cash position is in a net position of €503 million (estimate made by Oddo BHF for the end of this year) to which will be added a solid generation of free cash flow (between €280 and €320 million) and good management of WCR and Capex (growth investments).

As for profitability, the situation is equally reassuring given that inflation in the main production costs (raw materials, freight and electronic equipment) has eased and the marketing and communication budget remains quite reasonable. The increase in salaries only modestly dampens these good elements which, taken overall, are clearly favourable.

Taken together, these arguments seem to us to be weakly impregnated in a rather low valuation. At 16 times earnings for this year, a long-term investor will undoubtedly sense an interesting opportunity here.

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