Danone Finally Sold Its EDP Plants In Russia (OTCMKTS:DANOY)

Here at the Lab, we used to be more positive about Danone (OTCQX:DANOY). In the past, our buy case recap was based on: 1) activist involvement, 2) the company’s several growth engines, especially in the specialty nutrition business, 3) supportive dividend yield, and 4) multiple arbitrage opportunities and a discounted valuation on its multiples compared to its closest peers (despite a strong brand portfolio). However, over this year, we moved our rating from buy to neutral, publishing two analyses and focusing on Danone’s margin pressure. To get acquainted with the story you can have a look at the following articles:

1. Q1 Danone performances: Comment On Q1 Sales Trend
2. Half-year results comments: We Are Keeping Our Hold Rating

Before its Q3 results expected to be on the 27 of October, the company just released its “plans to transfer the effective control of its EDP business in Russia“.

Since the conflict started, Danone was assuring the investor community it would find the most suitable exit strategy for the Russian local division. Adding also to that, all the CAPEX investments in Russia were suspended. Now, it is official that Danone Russia will change hands. However, the company has not yet disclosed who the buyer will be.

In the press release, Danone emphasized that this is the best solution to ensure the continuity of the local business in the long term, for its employees, consumers, and partners.

Danone in Russia

Over the first nine months of 2022, the Russian EDP division accounted for approximately 5% of Danone’s net sales and partially offset the growth in like-for-like sales and the group’s recurring operating margin. Russia is the fifth largest market of the French giant by turnover, with about 90% of profits deriving from the sales of dairy and vegetable products.

At the end of June, Danone had nearly 7,200 employees in the country and operated at 13 production sites, including 12 in the division it plans to divest. Overall, the value of intangible assets and PPE held by the branches in Russia amounted to €588 million and €410 million respectively. Thus, as the company stated, this will result in a maximum write-down of €1 billion. Once closed, the transaction, which will be subject to regulatory approvals, will result in the deconsolidation of Danone EDP Russia’s activities.

Conclusion and Valuation

At the half-year end account, Danone declared that it wanted to focus its portfolio precisely on the production of essential EDP products as well as on infantile and medical foods. Even if this latest decision is going in the opposite direction and will lead to a negative one-off of almost €1 billion, it is a decision positively viewed by the market (and also expected). Indeed, Danone is up by almost 2% today. Under new leadership, we are confident that Danone will experience a good time (new external managers and higher cost saving too). At the moment, compared to consensus estimates, we are forecasting an increase in sales of almost 8% (driven by only a price increase and a negative volume growth for the Q3 account). Regarding the valuation, the French food giant is still trading at a considerable discount versus its peers on a P/E basis (14x versus 20.5x on 2023 numbers). However, we decide to maintain a hold rating. The key catalyst to watch are EU market shares, special nutrition sales in China (APAC region), raw material inflationary pressure with Danone strategy local first, and the company’s price elasticities.