Smart and Organic but Not That Cheap Anymore
Good Things Come in Small Packages
Do you know which is one of the first organic food brands?
It is Lavazza, the Italian coffee company. Lavazza started producing organic coffee in 1978, long before organic food went mainstream. They launched the first certified organic coffee called "Qualità Oro" after seeing demand from environmentally conscious consumers who wanted pesticide-free coffee. Lavazza worked with farmers in Central America to produce organic beans and paved the way for the organic coffee industry.
Today we are looking into Smart Organic (SO:BLG) - Bulgaria's largest producer and distributor of organic products. The company offers snacks, including energy and protein bars, cookies, granolas, and coconut and apple chips; superfood and organic essentials comprising organic grains, pulses, seeds, nuts, dried fruits, raw cocoa products, spirulina, maca, coconut oil, cocoa butter, and organic ghee. It sells its products under the Bett'r, Dragon Superfoods, Roobar, Kookie Cat, Rookies, and Smart Organic brands.
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At a Glance
BGN 80M estimated sales in 2023, up 40% YoY and 100% in Germany, its core market
growing 20-30% per year
guidance for 2024 is 25% growth, followed by 30% in 2025-26
best-in-class 48% gross margin
founded in 2009, manufactures healthy packaged foods
IPO in 2021 on the segment for SME financing of the Bulgarian Stock Exchange
70% of its production is exported
mostly in the German-speaking DACH region, primarily Germany
over 500 KW solar capacity provides half of its electricity needs
focused on production line automation to drive efficiencies and increase capacity
a tiny 3% free float (96% owned by CEO & founder Yani Dragov + 1% owned by key employees)
looking for acquisitions that will help it scale distribution
€1 = BGN 1.95583 (rounding up to 2 for easier calculations)
Smart Organic is a Bulgarian healthy foods company founded in 2009. The company’s main products are organic energy and protein bars and cookies, superfoods, plant-based proteins, salty snacks and basic foods. Its products are offered in over 60 countries in Europe, Asia, and America. The largest markets are Germany, Switzerland, Scandinavia, Benelux, Spain, France, Romania and the Middle East. The company offers its products through 650 locations in Bulgaria as well as online. Smart Organic's products are also sold in over 1500 locations of the large German drugstore chain dm.
In one company video, CEO and founder, Yani Dragov shares the origin story of Smart Organic, back in 2009 when there were virtually no healthy snacks in Bulgarian supermarkets and a pack of organic quinoa cost €7.50 in Bulgaria, compared to only €3 in Germany. That's when he decided to make healthy yet tasty snacks.
Smart Organic has two manufacturing facilities in Kniazhevo, Sofia and a new one, in nearby Boznhurishte, is coming online this April. The BGN 16M plant will boost production capacity to support sales of BGN 300M. This is an almost 4x increase compared to the BGN 80M sales in 2023.
Plant 1: Kniazhevo, Damianitsa 6
180 KW solar park
2 production lines for bars
2 production lines for cookies
5 vertical packaging lines
3 self-sealing packaging machines
Plant 2: New warehouse and production on the Kniazehvo site, completed in November 2022
300 KW solar park
Plant 3: New warehouse and production in Bozhurishte, financed with the IPO proceeds and a bank loan, and scheduled to open in April 2024.
Stage 1 - 6000 sq.m - The building will house two production facilities for chocolate products, baked goods, and raw bars, with which the company will significantly increase its capacity.
Stage 2 - additional 6000 sq.m.
Smart Organic went public on 11-Nov-2021 via an IPO on the BEAM growth segment of the Bulgarian Stock Exchange. The company raised BGN 6M at the IPO price of 18.90 (310K shares issued) or approximately €100M valuation. The stated goal of financing was "the acquisition of a German competitor and for the expansion of production capacity".
In December that year, the CEO sold BGN 287K worth of stock to employees at preferential terms and with a 2-year lock-up period. This may seem like a small amount, but you have to keep in mind that it is 2.5% of the company's equity. This is a rare event, especially for a Bulgarian company, and reflects positively on the CEO and his bid to create an ownership culture within the ranks.
Management is actively looking for bolt-on acquisitions that will boost Smart Organic's distribution network in its core markets or will provide a nice addition to the company's product portfolio. The last two years were quite active for the company.
Jan 2022: Amigos International Trade BV, a small distributor of bio products in the Netherlands and Belgium. The company was acquired for its network of arenga sugar suppliers. The acquisition is expected to help expand the import and marketing of organic arenga sugar from Indonesia under its Red Ape brand. Arenga sugar comes from the arenga palm tree, typical for tropical Asia. It has a caramel flavor that is much richer and complex compared to regular sugar. The lower glycemic index makes it a slightly healthier alternative. Plus, it contains some vitamins, minerals, and antioxidants. Smart Organic plans to distribute the product through its client network across Europe. There is no information about the acquisition price. All we know is that Amigos had sales of €140K in 2020.
July 2022: Santulita, maker of bottled smoothy brand Frudada, with sales around BGN 1.5M. Smart Organic bought 70% of the company with the option to acquire the remaining 30% in the next 4-6 years. The financial details of the transaction were not disclosed. Frudada smoothies are made using fresh fruit and veggies without added sugar, which makes them a great addition to the Smart Organic's portfolio.
July 2022: Biopak, a Bulgarian importer and distributor of compostable and biodegradable carton fiber and plant-based packaging. The acquisition is expected to enable Smart Organic to expand its client portfolio in the hospitality and food service sector. The price was BGN 218K for a company that did BGN 59K of profit on BGN 327K sales in 2021.
June 2023: Naughty Nuts, a German organic food startup Naughty Nuts for €150K, which was in bankruptcy proceedings. The Bulgarian company acquired only the assets, without any liabilities. The plan is to move the production to Bulgaria while keeping the distribution network in Germany. Naughty Nuts produces nut butters and distributes them to more than 1,200 retail locations, including major supermarkets. The products do not contain any animal fats, palm oil, or added sugar. The acquisition is part of Smart Organic's strategy to strengthen its position in the organic products market and expand its product portfolio. Moreover, Germany is a strategic region for the company.
The company's most popular Europe-wide product is the Roobar - a healthy energy bar made from raw fruit and nuts without added sugar. The bars have a simple-but-tasty 3-4-ingredient formula. The company sells around 1 million of these monthly.
The Kookie Cat is a vegan, gluten-free cookie made from oats and cashews.
The Bett'r line of snacks was started in 2017. It includes bio popcorn, quinoa snacks, full-grain crackers, granola, coconut chips and more.
The company also offers a wide selection of protein powders and super food under the Dragon Superfoods brand.
Here is link to Smart Organic's full product catalogue.
A breakdown of 2021 sales:
by activity: 71.6% production and 28.4% distribution
by product category: 34.2% bars; 18.0% cookies; 47.5% other
by brand: 36.5% Dragon Superfoods; 18.6% Roobar; 18.1% Kookie Cat; 10.4% Bett'r
by brand ownership: 46.9% own brands; 26.3% white label; 11.9% raw ingredients; 14.8% distribution brands
by channel: 90.4% B2B; 7.1% D2C (Zelen store); 2.6% D2C online
by market: 40.7% Bulgaria; 59.3% export
The organic food market in Europe is estimated at around €52B as of 2020, about the same size as the US organic food market, and it is expected to surpass €185B by 2030, a CAGR of 13.5%.
The organic food market is especially well-developed in Germany. Its size is €13B as of 2020 and is expected to reach €20B by 2025, 8.8% CAGR, which is only slightly below the 9.2% pace over the past decade.
Below are Smart Organic's P&L numbers from the latest investor presentation and a month-by-month comparison of sales for 2022 and 2023.
Sales for the full FY23 are expected to hit BGN 80M, making it the best year in absolute and relative terms. Growth is not smooth - 10%, 30%, 20%, 40% between 2019 and now - but I would take the chunky 24% CARG over a smooth 12%.
The 14% profit margin is quite good for an organic products business, where the norm is 5-10%. In terms of net and gross profit margins over the 2019-2023 period, Smart Organic compares favorably to Nestle. Of course, there are more differences between the two than similarities, but I found it interesting that the average gross margin is almost identical at 48.3% and the average net margin is 14.5% for Smart Organic and 13.7% for Nestle. The coincidences stretch to ROE as well - 30.6% and 25.8%. These two would make for a fun blind valuation exercise.
As of June 30, 2023, Smart Organic's balance sheet includes:
26.3M fixed assets
The 56.5M of assets are financed with:
6M current liabilities, of which 2M payables
5.9M long-term debt
As you see, the company is super conservatively financed. The CEO's effort to raise public financing in Bulgaria is also admirable. Basically, the 2021 IPO financed the expansion of the production facilities in Bozhurishte, which are coming online now. The latest plan is to move the listing to the main segment on the Bulgarian stock exchange, where it will be available to institutional investors, and raise additional 20M.
It is also worth mentioning that Smart Organic distributed BGN 0.08 dividend per share for 2021 and BGN 0.20 for 2022, doubling the payout ratio from 12% of profits to 24%. Still, this is only 1% yield on the current price of 21.40.
Speaking of which, Smart Organic's market cap is BGN 220M, which translates into a P/E of almost 20, assuming 14% profit margin on the 2023 sales number. It is also equal to 5x book value and almost 3x sales. These seem a bit high for a frontier market, especially for a tiny 80M business. But then again, the business has been growing by 24% on average, the market for their products is huge, and management is capable and shareholder-friendly.
high gross margins thanks to vertical integration and high value-add products
increasing production efficiencies via automation
a diversified product and customer portfolio
a great team
focus on R&D
Smart Organic is for the more adventurous among you, as is often the case with the companies I profile here.
The main risks facing the company and the measures it is taking to address them are:
shortage of raw ingredients - relying more on direct sourcing. Smart Organic is expanding its supplier network organically and via acquisitions.
increasing competition - innovation and better products. This one is tough. There are so many choices these days when it comes to healthy snacks. Smart Organic's strategy is to expand its product portfolio both organically and inorganically. Looking at the company's growth, so far it is working.
labor shortage - automatization and retention of engaged employees. This risk is coming more front and center these days. The labor market is still quite hot, despite some sectors, like real estate and IT, slowing down. The total unemployment rate is around historical lows. This is causing businesses to look for employees abroad, mostly in former Soviet Republics to the north and east of Bulgaria. The CEO has mentioned hiring Nepalese employees for the new facility in Bozhurishte. Apparently, employers have to go farther afield these days. This fact makes automation all the more important. It is good that management is thinking in that direction. I expect to hear some concrete plans in the near future. The additions to the solar parks' capacity tell me that the energy cost risk is not being ignored either.
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