JM’s 4 th Annual 5-a-side Charity Football Tournament 11 th August 2006 Final Score.
AASSSTTTEEERRRSS IINNN IIINNNAAANNNCCCEEE … · Kellogg’s, Nestlé, among others) in Portugal....
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MMMAAASSSTTTEEERRRSSS IIINNN FFFIIINNNAAANNNCCCEEE
EEEQQQUUUIIITTTYYY RRREEESSSEEEAAARRRCCCHHH
Worse Economic Scenario: We have updated our model with the
recent rise of EU Sovereign yields and the revised IMF estimates
for GDP growth and inflation. This impacted the Portuguese
operations much more severely as Biedronka’s weight in JM’s
valuation increased to 81% EV from 74%.
JM is safe even in turbulent periods: In Poland, JM is protected
against aggravated macroeconomic conditions, as the Polish
economy is expected to continue outperforming the EU average. In
Portugal, despite the deteriorating macro outlook, JM has a strong
leading position in both the supermarket and wholesale segments.
Biedronka will continue to drive JM’s growth: According to our
model, by 2020, JM’s Polish operations will represent 73% of total
sales and are expected to grow at a CAGR1 of 12,47%, until 2020.
We address three areas of investor push back: i) Biedronka can
accumulate a total of 3.000 stores by 2015, ii) Biedronka is safe
against any price-driven competition for market share, iii)
Biedronka can sustain a double-digit sales CAGR in the next ten
years and an EBITDA margin of (at least) 8%.
JM is expected to unveil its expansion plans to a 3rd
market
this year, which we expect to be a new trigger to JM’s share.
According to our Sum-of-the-Parts Valuation, our new Price Target
FY11 for JMT is 15,21€, which implies a potential return of
17,72%. Therefore, our investment recommendation does not
change: BUY.
1 In this report, all Compound Annual Growth Rates (CAGR) are denominated in Euros and refer to nominal growth rates.
JERÓNIMO MARTINS, SGPS COMPANY REPORT
FOOD RETAIL 27 MAY 2011
RUI DA SILVA [email protected]
The Euro Zone on shaky ground...
...While Poland escapes from turbulence.
Recommendation: BUY
Vs Previous Recommendation BUY
Price Target FY11: 15,21 €
Vs Previous Price Target 15,54 €
Price (as of 27-May-11) 12,92 €
Reuters: JMT.LS, JMT PL
52-week range (€) 6,61-12,92
Market Cap (€mn) 7.173,94
Outstanding Shares (mn) 629,293
Source: Bloomberg
Source: Bloomberg
(Values in € millions) 2010 2011E 2012E
Revenues 8.691 9.860 11.070
EBITDA 653 751 848
EBITDA Margin (%) 7,5% 7,6% 7,7%
EBIT 462 539 613
EBIT Margin (%) 5,3% 5,5% 5,5%
Net Profit 281 347 400
Capex (€mn) 434,2 644,6 696,2
Source: Company Data and Nova Research
0
2.000
4.000
6.000
8.000
10.000
0
5
10
15
02-01-2009 02-01-2010 02-01-2011
JMT vs PSI 20 (€)
JMT PSI 20
Company description
Jerónimo Martins, SGPS, S.A. is a Portugal-based company that operates in two countries in three main business segments: Food Distribution, Manufacturing and Services. Within Portugal, the Group controls the Pingo Doce (Supermarkets leader) and Recheio (leader in Cash & Carry operation) brands and, moreover, manufactures margarines, cooking oils, detergents and household cleaners. JM’s main source of revenue comes, however, from Poland’s largest and leading food retail chain: Biedronka.
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PAGE 2/34
Table of Contents
Company overview ................................................................................. 3
Company description ......................................................................................... 3
Shareholder and ownership structure ............................................................. 4
Past figures ......................................................................................................... 5
Portugal ................................................................................................... 8
Macroeconomic Environment ........................................................................... 8
The Portuguese Food Retail Market ............................................................... 9
Poland .....................................................................................................10
Macroeconomic Environment ......................................................................... 10
The Polish Food Retail Market ....................................................................... 11
Operational Forecasts ...........................................................................12
Capital Expenditures and Net Working Capital ....................................25
SOTP Valuation ......................................................................................27
Comparables ..........................................................................................31
Financial Ratios .....................................................................................32
Financial Statements .............................................................................33
Disclosures and Disclaimer ..................................................................34
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PAGE 3/34
31%
8%
2%
55%
3% 1%
Exhibit 1: Sales breakdown (2010)
Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Services
Source: Company Data
Company overview
Company description
Jerónimo Martins, SGPS, S.A. (JM) is a Portuguese Group with international
projection operating in three main business segments: Food Distribution,
Manufacturing and Services. In Portugal, JM has a leading position under the
Pingo Doce (supermarkets) and Recheio (cash & carry and food service
platforms) chains. Moreover, it is the largest industrial Group of Fast Moving
Consumer Goods (FMCG) – where it holds leading positions in several markets
(e.g. ice tea, ice cream, margarine, olive oil, fabric cleaners) through its
association with Unilever2, the Anglo-Dutch multinational, and Gallo Worldwide
3.
Additionally, the company owns a Services business unit that includes the
company Jerónimo Martins Distribuição de Produtos de Consumo (JMD), which
is responsible for the representation and distribution of international brands (e.g.
Kellogg’s, Nestlé, among others) in Portugal. However, JM’s most valuable
asset is in Poland: the hard discount chain Biedronka is the market leader in
food distribution and, in 2010, accounted for 55% of the Group’s total sales.
In Portugal, JM is the second largest Food Retail Group (right behind Sonae,
SGPS, S.A., its main competitor). However, if we consider both national and
foreign operations then, according to Deloitte Touche Tohmatsu Limited (DTTL)
and STORES Magazine, JM is ranked as the 85th
largest retailer around the
world while Sonae occupies the 139th position, based on publicly available data
for the fiscal year of 2009. The top of the same overall ranking that elects the
world’s 250 largest retailers was shared among: the American corporation Wal-
Mart that runs chains of large discount stores, the French hypermarket chain
Carrefour and Metro AG, the German retail and wholesale Group (see Exhibit 2).
Exhibit 2: Top 250 global retailers (FY09)
World Rank
Name of Company
Country of Origin
2009 Retail Sales (U.S. $mn)
# Countries of Operation
Dominant Operational Format
2004-2009 Retail Sales CAGR
1 Wal-Mart Stores, Inc. U.S. 405.046 16 Hypermarket/Superstore 7,3%
2 Carrefour S.A. France 119.887 36 Hypermarket/Superstore 3,4%
3 Metro AG Germany 90.850 33 Cash & Carry/Warehouse Club 3,0%
85 Jerónimo Martins, SGPS, S.A. Portugal 9.932 2 Discount Store 17,1%
139 Sonae, SGPS, S.A. Portugal 6.096 2 Hypermarket/Superstore 4,2%
250 Fuji Co. Ltd. Japan 3.075 1 Hypermarket/Superstore -1,5%
Source: Deloitte Touche Tohmatsu Limited and STORES Magazine
2 In 1949, a joint venture was set up between JM and Unilever and later, in 2007, with the merger of the companies: Fima VG, Lever Elida and
Olá, a new company was established: Unilever Jerónimo Martins. 3 Gallo Worldwide was created in 2009, when Unilever JM decided to separate its olive and seed oils business from the remaining ones.
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PAGE 4/34
Soc. Francisco Manuel
dos Santos
56%
Floating and Own
Shares31%
Asteck, S.A.10%
Carmig, Gestion
3%
Exhibit 3: Shareholder Structure
Source: Company Data
Shareholder and ownership structure
Currently, there are three qualified shareholders composing JM’s shareholder
structure that hold different stakes: Sociedade Francisco Manuel dos Santos
SGPS, S.A. which reinforced its position on February 2009 and now holds 56,1%
of the company’s capital, Switzerland’s Heerema Holding Company Inc which
operates in the oil and gas industries and acquired 10,01% of the Group’s share
capital through its Astek, S.A. investment vehicle4, on late February 2007, and
the French asset management company Carmignac Gestion with a 2,7% share –
the remaining company’s capital (31,2%) is free-floating. Thus, the Soares dos
Santos family is the major shareholder with the highest percentage of voting
rights (56,19%) and, thus, with the last word in any matter.
Additionally, there are differences in what concerns the ownership structure
of JM’s business units. As we can see below in Exhibit 4, in the Food Distribution
segment JM holds 51% of Retail Mainland (which includes Pingo Doce and, until
2010, also included the hypermarket chain Feira Nova) while the remaining 49%
is held by the Dutch supermarket operator Ahold. JM also holds 75,5% of
Madeira operations (where it performs under the Pingo Doce and Recheio
brands), while Recheio and Biedronka are fully owned by the Portuguese retailer.
The Manufacturing business unit is operated under a joint venture between JM
and Unilever, with stakes of 45% and 55%, respectively. Finally, concerning the
Services business unit: JMD is fully owned by JM, the Hussel chocolate chain
was the outcome of a joint venture between JM (51%) and the German specialist
retailer Douglas AG (49%), Caterplus resulted from a partnership between JM
(49%) and the Portuguese family enterprise Sugalidal (51%) and, lastly, JM holds
a 27,5% share in PUIG Portugal, which operates in the wholesale of perfumes
and cosmetics.
Exhibit 4: JM Ownership Structure
Source: Company Data and Nova Research
4 Asteck, S.A. is 100% controlled by the Heerema Holding Company and, thus, all the respective voting rights are attributed to the latter.
Jerónimo Martins, SGPS, S.A.
Food Distribution
Retail Mainland
(51%)
Recheio
(100%)
Madeira
(75,5%)
Biedronka
(100%)
Manufacturing
Unilever JM
(45%)
Gallo Worldwide
(45%)
Services
JMD
(100%)
Hussel
(51%)
Caterplus
(49%)
PUIG Portugal
(27,5%)
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PAGE 5/34
27% 27%
40%
47%
6%
29%
13%
23%
35% 37%
30%
20%
2005 2006 2007 2008 2009 2010
Exhibit 6: Biedronka Sales Growth
€ PLN
4,1
3,2
4,9
2005 2006 2007 2008 2009 2010 2011
Exhibit 6: PLN/EUR Exchange Rate
Source: Company Data
Past figures
i. Sales and EBITDA
Jerónimo Martins hasn’t been always a growth and successful story. However, in
the past recent years, it has been able to deliver a strong, solid performance. The
results speak for themselves: from 2005 to 2010, total sales grew at a CAGR
of approximately 17,8% and, in 2010, amounted to a total of €8.691mn. In the
same time period, the Group’s EBITDA also grew at a double digit CAGR of
16,2% and reached €653mn in 2010. Such results were only possible because
the management team i) successfully entered in a new and promising market and
ii) rebuilt its business model around its Portuguese supermarket chain.
Exhibit 5: JM Sales and EBITDA breakdown
Source: Company Data and Nova Research
The weight of Biedronka within JM has been increasing gradually in the past
years. In 2005, the Polish operations represented around 35% of the Group’s
total sales, while Retail Mainland had a bigger weight inside JM (approximately,
39%). From 2005 to 2010, however, Biedronka’s sales grew at an impressive
CAGR of 29% (far greater than any other business unit) making it now the
biggest business unit inside the Group, both in terms of sales (55%) and EBITDA
(60%). Consequently, the other four business units progressively lost weight
inside the Group and, today, they represent around 14% (13%) of JM’s total
sales (EBITDA).
On the other hand, a greater Biedronka weight in the Group’s operations implies
a greater exposure to the Polish Zloty. As we can see in Exhibits 6 and 7,
between 2005 and 2008, JM did not only benefit from operating in a growing
economy, but also through the Zloty-Euro conversion. However, notice that the
subsequent devaluation of the Zloty (from 3,3 to 4,8) had a huge negative impact
on Biedronka’s growth rate expressed in Euros. From the first quarter of 2009
onwards, the Zloty has progressively appreciated and, consequently, we can see
27%
7%
1%60%
5% 0,2%
EBITDA 2010Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Mkt., Repr. and Rest. services
39%
15%3%
35%
6% 2%
Sales 2005Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Mkt., Repr. and Rest. services
47%
13%3%
23%
14%0,5%
EBITDA 2005Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Mkt., Repr. and Rest. services
31%
8%
2%
55%
3% 1%
Sales 2010Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Services
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PAGE 6/34
0
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010
Exhibit 8: Capex Breakdown (€mn)
Retail Mainland Biedronka Others
Source: Company Data
3,3
4,8
2005 2006 2007 2008 2009 2010 2011
Exhibit 7: PLN/EUR Exchange Rate
Source: Bloomberg
the reflection in terms of the 2010 growth rates. Since we estimated the cash
flows of each business unit according to each local currency, we had to use
some sort of forecasts for the exchange rate in our model. Thus, we decided to
resort to forward exchange rates which means that our model incorporates
current expectations for the future exchange rate. Given its degree of
unpredictability (it’s an exogenous factor that the company does not control),
however, we view the Euro/Zloty exchange rate as JM’s major source of risk in
the future.
ii. Investment and Sales Area
The evolution of Biedronka’s importance within JM reflects not only an
extraordinary sales performance of the Polish stores, but also a substantial
amount of investment that has been directed to Poland, year after year.
In Exhibit 8, we highlight how JM’s investment policy on its main business units
has been evolving since 2005. The Group’s total investment gradually increased
at a CAGR of 73% until 2008 and, in that same year, reached its maximum: a
total of €874mn. Additionally, 37,4% (€327mn) and 58,2% (€509mn) of this total
amount were directed to Retail Mainland and Biedronka, respectively (as one can
see, the investments made in the other four business units, even when
accounted together, are not so relevant). In 2009, there was a substantial
contraction in total investment, which amounted to €312mn (-64% yoy), as a
consequence of a stronger prudence due to the tough economic context felt
at the time. All business units were obviously impacted, but especially Retail
Mainland and Biedronka which saw their Capex amounting to €113mn and
€182mn, respectively. However, after this shock, total investment started
increasing once again and, in 2010, amounted to € 434mn.
Another striking feature of Exhibit 8 is that, Biedronka has been gaining more and
more importance as it gets a higher percentage of total investment. Indeed, while
in 2005 the investment made in Poland represented 43% of total investment, in
2010 this percentage increased to 62%. As a consequence of a higher
investment, the number of Biedronka stores has been increasing at an average
of 169 stores per year, since 2005. More, by the end of 2010 the company had
already 1.649 Biedronka stores5, representing approximately 62% of JM’s
total sales area (sqm).
5 Expansion in Poland has been made both organically as well as through M&A operations. The Portuguese retailer bought 57 Tip stores from
the Metro Group (1998), acquired ex-Edeka stores in Gdansk, purchased some Rema 1000 and Carrefour stores. More recently (2008), JM took over all of Tengelmann’s Plus stores in Poland (210) and in Portugal (75) – an operation that amounted to €320mn.
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PAGE 7/34
9,7%
6,6%
8,1%7,6%
5,1%
8,2%
2005 2006 2007 2008 2009 2010 2011E
Exhibit 10: EBITDA Margins
Retail Mainland JM Biedronka
Source: Company Data and Nova Research
In Portugal, Pingo Doce has been the number one priority in terms of investment
and, by the end of 2010 it counted with 349 stores (see Exhibit 9). Moreover, in
2009, the Group concluded that this was the business unit with the best
positioning in the Portuguese market and, thus, decided to end the Feira Nova
brand and convert the remaining stores into the Pingo Doce format.
Exhibit 9: # Stores and sales area (sqm) by business unit
Source: Company Data and Nova Research
iii. EBITDA Margins
In the past three years, JM’s consolidated EBITDA Margin has inverted its
negative tendency and started growing year after year (see Exhibit 10). Notice
that this reflects the strategy and performance of the two main business units.
While JM decided to bet on low prices and high volumes (lower margins) in
Portugal, in Poland the EBITDA margin has been increasing year after year,
since 2007. This reflects an ambitious and continuous search for cost efficiency,
but it is also evidence that Biedronka is at a development stage where
benefits of scale impact at all levels. Indeed, the benefits taken were
sufficiently high to compensate the diluting impact of the Plus stores which, in
2009, were still operating at below full maturity. Additionally, as Biedronka grew
inside the Group, consolidated margins have become more and more dependent
on the Polish operations and less reliant on Retail Mainland.
JM’s current operating profitability (overall EBITDA margin of 7,5% in 2010)
compares with 3,98% for Carrefour or 4,96% for Metro AG. On the other hand,
operators with major exposure to Emerging markets, such as the Turkish BIM
retail chain and the Russians X5 and Magnit retail Groups, exhibit higher levels:
5,5%, 8,44% and 7,89%, respectively. This, in turn, suggests that it is Biedronka
that will continue to boost JM’s operational margins in the future.
32 33 33 35 35 38
805 9051.045
1.3591.466
1.649
1515
15
1515
15
208227
256
343343
349
2005 2006 2007 2008 2009 2010
# Stores
107.202 110.005 109.634 115.724 114.410 123.532
394.536 452.952536.729
753.531 814.493938.21813.697
13.69714.626
14.62614.300
14.253
279.842311.468
355.809
433.049434.744
437.317
2005 2006 2007 2008 2009 2010
Sales Area (sqm)
Retail Mainland
Madeira
Biedronka
Recheio
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PAGE 8/34
102,
1
11
1,5
107,
4
109,
4
106
,7
2007 2008 2009 2010 2011E
Exhibit 14: Consumer Spending (€bn)
1,4% -0,5% 1,2%
3,5%
-4,1%
2,1% 2,1%
20
06
20
07
20
08
20
09
20
10
20
11
E
20
12
E
20
13
E
20
14
E
20
15
E
20
16
E
Exhibit 11: Real GDP Growth Rates
Portugal European Union
7,8%
8,1%
7,7%
9,6%
11,0%
11,9%
12,4%
11,9%
11,3%
10,6%
9,8%
2006
2007
2008
2009
2010
2011
E
2012
E
2013
E
2014
E
2015
E
2016
E
Exhibit 12: Unemployment(Percent of total labor force)
Source: IMF
Source: Bloomberg
Source: Bloomberg
Source: IGD and Nova Research
4,2%
5,8%
9,6%
30-
03-
200
7
30-
07-
200
7
30-
11-
200
7
31-
03-
200
8
31-
07-
200
8
30-
11-
200
8
31-
03-
200
9
31-
07-
200
9
30-
11-
200
9
31-
03-
201
0
31-
07-
201
0
30-
11-
201
0
31-
03-
201
1
Exhibit 13: Portuguese 10-year Gov. Yield
Portugal
Macroeconomic Environment
Since the beginning of the 21st century, Portugal has been constantly growing
below the EU average (exception to 2009) and, in the future, there is no
evidence suggesting that this tendency will change. Furthermore, according to
IMF’s revised growth estimates, Portugal will be under a recession in both 2011
and 2012, while unemployment is expected to continue increasing until 2012.
The incapacity to increase the country’s competitiveness, combined with
permanent negligible growth rates and a heavy debt repayment burden,
increased the likelihood of Portugal not being able to comply with its obligations.
As financial markets assimilated this information, global rating agencies started
downgrading the Portuguese credit rating (currently at Baa1, according to
Moody’s), as they perceived Portugal as a riskier country with a higher probability
of incurring in default. Consequently, creditors started demanding higher
interest rates (see Exhibit 13) which, ultimately, became unsustainable for
Portugal. Thus, after Greece and Ireland, the Portuguese government, facing a
real threat to the financing of the Republic and to its banking system, had no
option left but to request an emergency bailout from the EU. In exchange for a
€78mn 3-year rescue package, Portugal committed to achieve a reduction of the
Government deficit to 5,9 percent of GDP this year and to 3 percent in 2013.
After the decisions to cut wages in the public sector and to increase the value
added tax (VAT) for 2011, austerity measures are expected to continue after this
agreement (e.g. wages in the government sector will be frozen in nominal terms
in 2012 and 2013, while VAT will increase substantially, especially concerning
electricity and gas).
Conclusion: in the future it is expected a decrease in households’ disposable
income and, inevitably, a contraction of consumption, given this dark
macroeconomic scenario. However, we slightly revised downwards our sales
figures in Portugal, as JM’s business relies deeply on food retail and the
expenses associated with it tend to be the last ones to forgo. Moreover, Pingo
Doce and Recheio are leaders in their segments and should continue to
strengthen their positions. Lastly, we decided to fine-tune our model, so as to
reflect the recent rise of the Portuguese Sovereign yield which, as we further
discuss, impacted JM’s cost of capital negatively.
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PAGE 9/34
8% 7%
24%
6% 5%
11%
14%20%
9%10%
2006 2007 2008 2009 2010
Exhibit 16: Sales Growth Rates
Sonae MC Jerónimo Martins
20%
19%
9%7%6%
5%
34%
Exhibit 15: Portuguese Food Retail Market Shares (2010)
Sonae MC
Jerónimo Martins
Intermarché
Auchan
Lidl
Minipreço
Others
0
500
1.000
1.500
2.000
2005 2006 2007 2008 2009
Exhibit 17: Sales Area ('000 sqm)
Modelo e Continente Pingo Doce
Lidl Auchan
Minipreço
Source: Company Data
Source: Company Data and Nova Research
Source: APED and Nova Research
The Portuguese Food Retail Market
In 2010, the Top 5 retailers represented, approximately, 61% of the
Portuguese Food Retail market6 – this level of concentration is in line with
other Western European mature markets7. Among these main retailers, Sonae
MC and Jerónimo Martins held the biggest market shares (20% and 19%,
respectively) while Intermarché, the Auchan Group and Lidl, altogether, held
around 22% of market share (see Exhibit 15).
The world’s most recent financial crisis impacted negatively all of these food
retailers8 and, in Exhibit 16, we highlight what happened to JM and its main
competitor. In both cases, it is visible this effect as sales growth rates fell
sharply after 2008. Moreover, according to this graph, JM had not only a
stronger response to the tough macroeconomic scenario, but also a higher
growth (CAGR of 12,64%) than Sonae MC (CAGR of 9,88%), in the past 5 years.
Throughout time, these two main food retailers were able to increase their market
shares (though, in different proportions), through M&A operations9 but especially
via organic growth – the Modern Grocery Distribution (MGD) segment is thus
growing mainly at the expense of traditional retailers which, by 2010,
represented approximately 25% of the Portuguese retail market. In the future, we
expect these two largest Portuguese retailers to continue increasing their market
share, at the expense of small supermarkets and traditional retail, which are the
most penalized by the tough environment in Portugal, according to Nielsen.
Furthermore, recently both leaders adopted a similar strategy, which consisted in
repositioning their food retail business by having a single and their stronger brand
operating10
.
As we further discuss, there are not very ambitious plans in terms of new store
openings for the near future, something that reflects the negative
consequences that the current and future austerity measures are expected
to originate, but also, the advanced stage of the Portuguese Food Retail
market. Moreover, we argue that Pingo Doce should be able to continue
increasing its market share as it developed an adequate strategy that best suits
the Portuguese consumers’ needs.
6 In our definition we do not include Cash & Carry operations (thus, Recheio is not accounted in JM’s market share). 7 In France, for example, the 5-firm concentration ratio is equal to 65% (see the Biedronka chapter for further details). 8 According to APED, both Lidl and Minipreço posted negative growth rates from 2008 to 2009 (-2,02% and -0,77%, respectively). 9 As we’ve mentioned earlier, JM acquired the Plus operations, while Sonae bought the Carrefour hypermarket operations in 2007. 10 JM changed the brand Feira Nova into Pingo Doce, while Sonae decided to have a single brand by merging both Modelo and Continente.
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PAGE 10/34
6,2%
1,7%
3,6% 3,9%
3,5%
-4,1%
2,1% 2,1%
20
06
20
07
20
08
20
09
20
10
20
11
E
20
12
E
20
13
E
20
14
E
20
15
E
20
16
EExhibit 18: Real GDP Growth Rates
Poland European Union
187,
2
221
,9
188
,2
210
,4 222
,4
2007 2008 2009 2010 2011E
Exhibit 20: Consumer Spending (€bn)
Source: IMF
13,8%
9,6%7,1%
8,2%
9,0%
9,0%
8,7%
8,5%
8,2%
8,0%
8,0%
200
6
200
7
200
8
200
9
201
0
20
11E
20
12E
20
13E
20
14E
20
15E
20
16E
Exhibit 19: Unemployment (Percent of total labor force)
Source: IGD and Nova Research
Source: IMF
Poland
Macroeconomic Environment
From the 27 countries that compose the European Union, Poland was the only
one that stood out during the most recent global financial crisis, registering a
positive growth in 2009 (1,7%). As we can see in Exhibit 18, despite the
considerable drop on its real GDP growth rate, this country was able to remain
above the EU average – a tendency that should not change in the next 5 years,
according to the International Monetary Fund. To a large extent, Poland’s stout
domestic demand11
, its flexible currency (the Zloty) and its less fragile banking
sector, all together, allowed a better performance. Furthermore, the 2012 UEFA
European Football Championship – hosted by Poland and Ukraine – was also
important for this behavior of the Polish economy, since some infrastructure
investments, backed by an inflow of EU funds, have already begun.
Additionally, throughout time, Poland has been able to substantially decrease its
unemployment rate, even though it increased in 2009 as a consequence of the
international financial crisis (see Exhibit 19). For instance, in 2004, 18,9 percent
of total labor force were unemployed and, by 2008, this number had been
reduced by more than half.
Additionally, Poland has been able to escape the turbulence that has
impacted the Euro Zone in the past recent months. Contrarily to Portugal,
Poland has not seen its credit rating being downgraded and, according to
Moody’s, it preserves its A2 rating which has been constant since 2003.
Conclusion: contrarily to Portugal, Poland’s current macroeconomic context
creates good prospects for the future. Even though consumer spending fell
sharply in 2009, as a consequence of a slower GDP growth, we can see in
Exhibit 20 that it recovered in 2010 and is expected to go beyond the level
recorded in 2008 throughout the current year. This will help to boost the food
retail market which, in 2011, is expected to grow at 5%, according to PMR
Corporate. This, in turn, makes us believe that Poland will be able to sail through
the storm that has been affecting Europe. Therefore, we conclude that
Biedronka will continue to be JM’s main source of profitability and growth
driver, which explains the aggressive expansion plan to be implemented
there in the next triennium.
11 Contrarily to its neighbors, Poland relies much less on its exports due to its solid internal market, which has seen a middle class rising in the
last 10 years.
The Polish economy is expected to continue outperforming the EU
average...
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PAGE 11/34
12%
7%
7%
6%
6%
6%
4%
52%
2010
Biedronka
Schwarz Group
Tesco
Carrefour
Auchan
Spolem
9%5%
6%
5%
4%
5%
4%
62%
2008 Biedronka
Schwarz Group
Tesco
Carrefour
Auchan
Spolem
Real
Other
The Polish Food Retail Market
With a population size over 38 million people, Poland is the 6th most populous
member of the EU and, consequently, not only one of the leading economies in
Central and Eastern Europe, but also the 9th largest Grocery Retail market
across Europe (see Exhibit 21). According to IGD Retail Analysis, the number
one spot in the Polish Food Retail industry12
belonged to Biedronka, with a
market share of 12% in 2010, clearly above major retailers such as the Schwarz
Group (operating under the Kaufland hypermarkets and the Lidl hard discount
chain), Tesco or Carrefour (see Exhibit 22). Moreover, notice that the Top 5
retailers accounted for, approximately, 38% of the Polish Food Retail
market (against 61% in Portugal). Indeed, this is an evidence that the Polish
market is much more fragmented and, thus, subject to a fiercer competition.
Another striking feature of Exhibit 22 is that, most of the retailers we highlight
have been able to increase their respective market shares since 2008. This
growth has essentially been made at the expense of the traditional retail
segment which, by 2010, had a 50% share in Poland13
(versus 20-25% in
Portugal) – an indicator of a less developed market. However, we also highlight
that some of this growth was boosted by M&A operations, since the Polish retail
market is moving fast towards consolidation with main players purchasing
small retailers14
. In the future, all retail formats have room for further growth.
This, in turn, will continue to occur especially at the expense of the traditional
retail segment as it share converges to Western European standards (by 2020, it
should account for 25-30% market share).
Exhibit 22: Polish Food Retail market shares
Source: IGD and Nova Research
12 IGD defines the Food Retail market as: “all food, drink and non-food products sold through all retail outlets selling predominantly food in a
given country”. It includes both modern and traditional formats (and excludes Cash & Carry operations). 13 Around 7.000 small grocery stores were closed in 2008. 14 The last deal was made by Mid Europa Partners (UK-based private equity firm), which acquired Zabka Polska SA (Poland’s largest
convenience-store chain), last February.
Exhibit 21: Europe’s 2009 Top 10 Grocery Retail Markets (€bn)
1. France 208,16
2. Russia 166,70
3. UK 164,23
4. Germany 161,82
5. Italy 129,52
6. Spain 99,63
7. Turkey 54,78
8. Switzerland 35,93
9. Poland 34,58
10. Netherlands 34,48
Source: IGD and Nova Research
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PAGE 12/34
Operational Forecasts
The departure point consisted in estimating JM’s number of stores, sales area
(sqm) and the evolution of sales per sqm, for each business unit. For this, we
relied on the company’s guidelines15
, on the different macroeconomic scenarios
(Poland and Portugal) and on our perception of each market’s competitive and
saturation levels. Furthermore, in order to estimate the sales area, we relied on
the latest available information (2010) concerning the average size of each store.
We believe this is reasonable since we do not expect the company to present
major changes relative to each store format and size. Finally, even though we
fully incorporated the company’s expansion guidelines for Biedronka, we were a
bit more cautious with the Retail Mainland business unit.
Retail Mainland
In the last five years, the sales area concerning the Retail Mainland business unit
grew at a CAGR of 9,34%, being this growth mainly driven by Pingo Doce (PD)
openings16
. During the same period, sales grew at a CAGR of 12,64%. In terms
of the EBITDA margin, there was a slight decrease in 2010, which reflected
several factors that occurred throughout the year: i) the management decision to
strengthen the brand’s awareness by increasing the investment in advertising, ii)
the deflation in the PD basket, especially, during the first half of the year and iii)
the integration of the Plus and Feira Nova stores under the PD brand. Below, in
Exhibit 7, we present our operational forecasts for Retail Mainland.
Exhibit 23: Retail Mainland Operational Forecasts
2010 2011E 2012E 2013E 2014E 2015E 2020E
Total # Stores 349 352 355 358 360 362 366
Total Sales Area ('000 sqm) 437 440 444 447 449 451 455
Growth (%) 0,59% 0,72% 0,72% 0,71% 0,47% 0,47% 0,00%
Sales (€ mn) 2.695 2.824 2.960 3.140 3.322 3.524 4.126
Growth (%) 10,13% 4,80% 4,80% 6,09% 5,80% 6,06% 3,01%
Sales/sqm (€ tho.) 6,2 6,4 6,7 7,0 7,4 7,8 9,1
Growth (%) 9,49% 4,05% 4,05% 5,33% 5,30% 5,57% 3,01%
Capex (€mn) 115,5 102,5 107,2 97,1 93,1 95,4 98,9
Source: Company Data and Nova Research
According to our forecasts, there will be a decrease in PD new openings. Thus,
total sales area is expected to grow at a CAGR of 0,40% until 2020, clearly below
past figures, as we don’t see many opportunities for further organic growth
in a market that we already deem mature. Meanwhile, sales are expected to
15 JM investor’s day, 2010. 16 In 2010, JM opened seven PD stores.
We relied on the latest available information concerning the average size of each store...
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PAGE 13/34
6,2%
6,4%
6,6%
6,8%
7,0%
7,2%
0
1.000
2.000
3.000
4.000
5.000
201
0
201
1E
201
2E
201
3E
201
4E
201
5E
201
6E
201
7E
201
8E
201
9E
202
0E
Exhibit 24: Retail Mainland
Sales (€ mn) EBITDA Margin (%)
grow at a CAGR of 4,35%, until 2020, being the following two years more
penalized in terms of growth due to the tough austerity measures that already
have and will continue to impact negatively consumption. Despite this dark
economic scenario, we remain particularly optimistic on the Retail Mainland’s
operations due to four specific reasons:
i. PD has a strong competitive position and is increasing its market share: PD
has today, together with Sonae MC, a leading position in the Portuguese Food
Retail market. In 2010, while the food retail segment grew 1,6% yoy, PD total
sales grew by approximately 10%, meaning that PD is increasing its market
share, even under a tough economic environment. Furthermore, according to
Nielsen, traditional retail and small supermarkets are the most affected ones in
tough economic environments, which should leave room for larger retailers to
gain further market share in the future. At the same time, the competitive
pressure coming both from Lidl and Minipreço has eased in recent years, even
though the latter revealed its intentions to reformulate its business strategy17
.
ii. Investment on differentiating pillars: Throughout time, JM has not only
maintained its stable and low price policy, but also kept its investment strategy on
important differentiating pillars of the PD banner, such as: Private Brand18
,
Perishables19
and, more recently, Meal Solutions (Take Away and
Restaurants)20
. At the same time, during last year, there was a strong effort to
diffuse the banner’s awareness through an increased investment in advertising to
levels in line with the sector’s average. These efforts to build up a differentiating
commercial proposition allowed PD to receive increasing customer preference,
while strengthening its position with a like-for-like sales growth equal to 8,4%
in the supermarkets (7,2% in the whole store network), in 2010. In the future,
the company intends to build stronger partnerships with suppliers of both
Perishables and Private Brand, while maintaining its competitive price policy with
the main objective of growing and reinforcing market share.
iii. Efforts concentrated on a stronger brand: We believe JM made a good move
when decided to extinguish Feira Nova as a brand and to convert the respective
hypermarkets under the PD banner. In this way, the Group will be able to
concentrate its efforts and resources on a stronger brand (recall that Feira Nova
was the 3rd
hypermarket player in Portugal).
17 In 2010, there was some speculation that Carrefour wanted to sell their 524 Minipreço stores and, consequently, leave Portugal. However,
more recently, the Group revealed its intentions to reformulate its strategy and to have 600 operating stores until 2016. 18 At the end of 2010, there were 2.011 references in the Private Brand assortment (representing around 38% of the Company’s total sales). 19 Perishables represent 34,3% of the Banner’s sales. 20 Out of the company’s 349 stores, take away sales are already present in 214 of them and there are 33 restaurants already operating.
Source: Company Data and Nova Research
While PD is increasing its market share, traditional retail and small supermarkets are being impacted negatively...
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iv. Improvement of the EBITDA margin: After a small decrease in 2010, we
expect the EBITDA margin to gradually recover until it stabilizes at 7%, in 2020.
This will be mainly driven by the logistics improvement that the company is
expected to undertake, between 2011 and 2013, and a larger scale with the
integration of the Plus and Feira Nova stores totally assimilated. Currently there
are seven distribution centers (DCs), but the company set the target of having
four to five over the next three years. The purpose is to improve cost efficiency
through a more rational geographical distribution of its DCs. Furthermore, the
costs concerning the integration of the former Plus stores are being diluted and
the benefits arising from private brand scale are still to come.
Exhibit 25: Retail Mainland Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Sales 2.695 2.824 2.960 3.140 3.322 3.524 4.126
EBITDA 174 186 195 210 223 236 289
EBITDA margin (%) 6,5% 6,6% 6,6% 6,7% 6,7% 6,7% 7,0%
Depreciation (90) (91) (93) (94) (94) (94) (102)
EBIT 84 95 102 117 129 142 186
EBIT margin (%) 3,1% 3,4% 3,5% 3,7% 3,9% 4,0% 4,5%
Source: Company Data and Nova Research
Recheio
During the last five years, the Recheio business unit has been able to expand its
sales area at a CAGR of 2,88%, while sales grew at a CAGR of 4,52%. At the
same time, the EBITDA margin, which had stabilized around 6% in the past few
years, increased to 6,2% in 2010, reflecting the success of the overall strategy to
increase sales.
In the future, we expect the number of openings to gradually decrease and, by
the end of 2020, JM should count with 43 Recheio stores (which, in terms of
sales area, corresponds to a CAGR of 1,24% in the following ten years). Despite
its leading position, Recheio operates in a highly mature market and, thus, we do
not foresee plenty of expansion opportunities. Until 2020, we expect sales to
grow at a CAGR of 3,72%, which is below past performance, while the EBITDA
margin is expected to evolve according to past figures and stabilize around 6,1%.
In 2010, Recheio continued to operate in a difficult environment as its two main
target markets posted negative growth - according to Nielsen, the Portuguese
Traditional Retail segment posted a contraction of 9,7% yoy, which confirms the
negative trajectory of the past few years that is expected to continue. At the same
time, Recheio will continue facing a tough environment in the near future, as then
the HoReCa channel’s turnover is expected to fall again in 2011.
The Group set the target of reducing its number of DCs to four or five...
Recheio operates in a highly mature market...
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PAGE 15/34
6,0%
6,1%
6,2%
6,3%
0
200
400
600
800
1.000
1.200
20
10
20
11E
20
12E
20
13E
20
14E
20
15E
20
16E
20
17E
20
18E
20
19E
20
20E
Exhibit 27: Recheio
Sales (€ mn) EBITDA Margin (%)
Exhibit 26: Recheio Operational Forecasts
2010 2011E 2012E 2013E 2014E 2015E 2020E
Total # Stores 38 39 40 41 41 42 43
Total Sales Area ('000 sqm) 124 127 130 133 133 137 140
Growth (%) 7,97% 2,63% 2,56% 2,50% 0,00% 2,44% 0,00%
Sales (€ mn) 721 746 772 810 830 874 1.039
Growth (%) 4,64% 3,46% 3,52% 4,90% 2,45% 5,37% 3,01%
Sales/sqm (€ tho.) 5,8 5,9 5,9 6,1 6,2 6,4 7,4
Growth (%) (3,08%) 0,80% 0,93% 2,34% 2,45% 2,86% 3,01%
Capex (€mn) 29,1 16,6 17,1 17,6 11,0 18,5 13,2
Source: Company Data and Nova Research
However, we have reasons to believe that Recheio will be able to overcome
these adversities, as it did in the past, due to the following three reasons:
i. Market leader and market share growth: Considering the two main players
acting in the Portuguese Wholesale Market, Recheio is the one with a clear
leading position. According to JM, in 2010, Recheio had a 37,5% market share
while Makro held 21,7%. This is even more important if we consider that, in 2005,
Recheio (Makro) held 24,5% (22%) market share. Concluding, Recheio is not
only the market leader, but has also been able to reinforce its leading position
throughout time. Furthermore, even with both the HoReCa channel and the
Traditional Retail segments posting negative growth, Recheio has delivered solid
and positive sales growth in both target markets (4,5% and 2,1%, respectively).
In this way, it strengthened its market share and ended 2010 with a 3,2% like-
for-like sales growth.
ii. Adequate strategy: A great percentage of Recheio success in 2010 was, in our
view, due to a rigorous planning. Anticipating a year of difficulties and aware that
today’s consumers attribute greater value to the Banners’ value proposition, the
Group decided to invest in strong promotional campaigns targeted at its
customers (consolidating its differentiation in key areas, such as Perishables21
)
and increased its proximity to clients through a series of events that allowed the
above-mentioned sales growth. At the same time, in order to strengthen the
Banner’s presence in crucial locations for the HoReCa market, Recheio opened
three more stores which reinforced the proximity with its customers. This ability to
redefine strategies according to new market circumstances is, in our view, a key
element that will allow Recheio to continue strengthening its market leadership.
21 In 2010, Perishables represented 14,9% of Recheio’s sales and posted a growth of 20,5% yoy.
Source: Company Data and Nova Research
Recheio is the leader of the Portuguese Wholesale Market...
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PAGE 16/34
iii. Private Brands – The Amanhecer project: Private Brands have also seen their
importance growing within Recheio22
and, in 2010, priority was given to the
Amanhecer brand which ended the year with a total of 129 products. In 2011, this
project is expected to continue and, on February, two Amanhecer stores were
opened (Lisbon and North of Portugal). According to JM, the purpose of this
recent initiative is to revitalize the Portuguese Traditional Retail segment, which
has been subject to a huge pressure in the past years. In essence, this results in
a commercial cooperation agreement between two parties, whereby Recheio is
responsible for the entire logistical operation. The traditional retailer that owns
the space, in turn, commits to purchase 75%-80% of its products to Recheio and
to offer a majority of Amanhecer products. JM has received many requests by
traditional retailers to convert their stores into this new concept and, until the end
of the year, the company expects to have a total of 20-25 Amanhecer stores
operating. We believe Recheio will be able to boost sales associated with the
Amanhecer brand, thus benefiting from an increasing scale in the wholesale
segment.
Exhibit 28: Recheio Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Sales 721 746 772 810 830 874 1.039
EBITDA 44 46 47 49 51 54 63
EBITDA margin (%) 6,2% 6,1% 6,1% 6,1% 6,2% 6,2% 6,1%
Depreciation (9) (9) (10) (10) (10) (10) (11)
EBIT 35 36 37 39 41 44 52
EBIT margin (%) 4,9% 4,8% 4,8% 4,9% 5,0% 5,0% 5,0%
Source: Company Data and Nova Research
Madeira
In the last five years, operations in Madeira have been pretty stable from a sales
area point of view (the number of stores remains constant and equal to 15, at
least since 2005). Meanwhile, sales grew at a CAGR of 6,22%, during the same
time period. In 2010, as expected, the EBITDA margin fell 10 bps relative to the
previous year (4,8%) due to the storm that hit the island and led to the closure of
PD two biggest stores in that region, until the 7th of June.
Also worth mentioning is the fact that, despite the temporary closure of the two
main stores, PD sales in Madeira grew approximately 9,8% yoy, which was only
possible due to its capacity to retain clients.
22 In 2010, the sales referring to the Private Brands with which Recheio works – Gourmês, Masterchef and Amanhecer – represented 17,1% of
Recheio’s sales and increased 11,6% yoy.
The purpose of the Amanhecer project is to revitalize the Portuguese Traditional Retail segment...
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PAGE 17/34
4,5%
4,6%
4,7%
4,8%
4,9%
5,0%
0
50
100
150
200
2010
2011
E
2012
E
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
Exhibit 30: Madeira
Sales (€ mn) EBITDA Margin
Exhibit 29: Madeira Operational Forecasts
2010 2011E 2012E 2013E 2014E 2015E 2020E
Total # Stores 15 15 15 15 15 15 15
Total Sales Area ('000 sqm) 14 14 14 14 14 14 14
Growth (%) (0,33%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
Sales (€ mn) 142 145 147 149 152 154 170
Growth (%) 7,58% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%
Sales/sqm (€ tho.) 10,0 10,2 10,3 10,5 10,6 10,8 12,0
Growth (%) 7,93% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%
Capex (€mn) 12,6 2,4 2,5 2,5 2,6 2,6 2,9
Source: Company Data and Nova Research
Similarly, despite all the negative impacts on tourism (with effects being felt
through the HoReCa channel), Recheio was still able to post an annual growth of
2,3%, benefiting from a redesigned distribution strategy at the hotel and
restaurant levels. For the future, we expect the number of stores to remain
constant and, thus, there should be no significant changes in the total sales area.
Nevertheless, we believe that both Pingo Doce and Recheio will continue
strengthening their market leadership, as long as they keep applying the recipe
that has proven successful in Portugal Mainland: investment on differentiating
pillars and a very competitive price policy. Sales should, therefore, grow at a
CAGR of 1,84% until 2020, while the EBITDA margin, after a slight decrease in
2010, should recover in the following years and stabilize at 4,9%.
Exhibit 31: Madeira Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Net Sales & Services 142 145 147 149 152 154 170
EBITDA 6,7 7,0 7,1 7,3 7,4 7,6 8,4
EBITDA margin (%) 4,7% 4,8% 4,8% 4,9% 4,9% 4,9% 4,9%
Depreciation (1,0) (1,0) (1,1) (1,1) (1,1) (1,2) (1,3)
EBIT 5,7 5,9 6,0 6,2 6,3 6,4 7,0
EBIT margin (%) 4,0% 4,1% 4,1% 4,2% 4,2% 4,1% 4,1%
Source: Company Data and Nova Research
Biedronka
During the last five years, JM has been executing an aggressive store opening
plan in Poland and, consequently, sales area have been increasing at a CAGR of
18,92%. Sales, in turn, have also been increasing at a fast pace (a CAGR of
28,95%, during the same time period), while the EBITDA margin has been
improving year after year (increasing from 7,2%, in 2009, to 8,1% in 2010).
These results derive from Biedronka’s impressive performance which has been
strengthened exactly by its growing operational scale, but also by the fact that
they are cost leaders in the Polish food distribution segment, allowing them to
Source: Company Data and Nova Research
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PAGE 18/34
maintain the market price leadership. Below, in Exhibit 32, we present our
operational forecasts for JM’s Polish operations.
Exhibit 32: Biedronka Operational Forecasts
2010 2011E 2012E 2013E 2014E 2015E 2020E
Total # Stores 1.649 1.854 2.089 2.300 2.650 3.000 3.375
Total Sales Area ('000 sqm) 938 1.055 1.189 1.309 1.508 1.707 1.920
Growth (%) 15,19% 12,43% 12,68% 10,10% 15,22% 13,21% 1,05%
Sales (€ mn) 4.807 5.813 6.856 7.778 9.185 10.833 15.573
Growth (%) 29,05% 20,94% 17,94% 13,45% 18,08% 17,94% 6,51%
Sales/sqm (€ tho.) 5,1 5,5 5,8 5,9 6,1 6,3 8,1
Growth (%) 12,03% 7,56% 4,67% 3,04% 2,49% 4,18% 5,40%
Sales/sqm (tho. PLN) 20,5 22,1 23,6 25,1 26,7 28,4 38,8
Growth (%) 3,71% 8,04% 6,61% 6,47% 6,25% 6,48% 6,46%
Capex (€mn) 270,9 516,9 563,8 549,2 773,9 823,6 342,5
Source: Company Data and Nova Research
We’ve incorporated JM’s aggressive expansion plans in Poland and, therefore,
we expect it to accumulate a total of 3.000 Biedronka stores by 2015, which
corresponds to an increase in total sales area from 938.218sqm to 1.706.890sqm
(or, a CAGR of 12,71%). After 2015, we expect a substantial slowdown in the
networking expansion pace and the total sales area is expected to grow at a
CAGR of just 2,38%. In terms of sales, we expect them to grow at a CAGR of
12,47%, from 2010 to 2020, while the EBITDA margin is forecasted to stabilize at
8% from 2017 onwards.
As before, we now present the arguments behind our assumptions and forecasts
which are in line with the company’s projections. This is one of the most
important aspects of our valuation since Biedronka is JM’s most valuable asset
and, consequently, all estimates concerning this business unit have a huge
impact in the final price target. We develop our discussion around three topics
that are crucial for most investors: i) the likelihood of JM’s medium-term
expansion plans in Poland, ii) the Polish competitive environment and
iii) Biedronka’s capacity to sustain a double-digit sales CAGR for the next ten
years and an EBITDA margin of 8%.
i. A total of 3.000 Biedronka stores by 2015. Just how reasonable is that?
As stated before, we’ve assimilated in our model the Group’s medium-term
Polish expansion plans, thus incorporating an average of 270 net additions per
year until 2015. To support our view, we first argue that a sales area CAGR of
18,92%, in the past five years, is evidence of the Group’s commitment and
capacity to execute pretty ambitious expansion plans. Thus, there is a
successful and solid track record, which provides us confidence for the future.
We have incorporated JM’s aggressive expansion plans in
Poland...
Biedronka is JM’s most valuable asset...
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PAGE 19/34
28% 30%
50%
65% 70% 72% 74%
92% 93%
Turk
ey
Ru
ssia
Po
lan
d
Cz.
Rep
ub
lic
Net
her
lan
ds
Spai
n
Fran
ce
Ger
man
y
UK
Exhibit 33: Modern Retail Share
15% 20%
38%50% 51%
63% 65% 65%
83%
Ru
ssia
Turk
ey
Po
lan
d
Cz.
Rep
ub
lic
Net
her
lan
ds
Ger
man
y
Fran
ce
Spai
n
UK
Exhibit 34: Top-5 Retailers Share
Furthermore, the Polish retail market is still far from being considered a mature
market. For instance, organized modern retail accounts just for 50% of the
Polish market, which is still considerably low once compared to Western
European standards (where modern channels account for 70-90% of the Food
Retail segment). At the same time, the Top-5 retailers account for a 38%
market share which is also evidence of a developing market that has not
reached maturity yet. These contrasts are illustrated in both Exhibits 33 and 34,
where we can observe how Poland compares with both mature European retail
markets (e.g. Germany or France) and other fragmented and less developed
markets such as the Turkish or the Russian ones. Therefore, this scenario
represents a major occasion for modern retail chains to strengthen their position
in this market, especially for the leader Biedronka which should see its market
share increasing up to 15-16% by 2015, according to our estimates. This
increase is expected to be mainly driven at the expense of the traditional retail
segment, rather than from Biedronka’s direct competitors.
Additionally we’d like to emphasize that, according to our assessment, there is
margin for further store density growth within the Polish HD segment. Today,
Biedronka accounts for about 72% of the Polish discount stores which amounted
to a total of 2.300, in 2010 – substantially less when compared to Germany
(16.000), for example. Looking at both markets, this means that there is one
discount Polish (German) store per 16.500 (5.100) citizens.
Assuming that Biedronka will indeed achieve its medium term goal and,
moreover, that the other HD competitors will maintain their expansion plans
according to the average of the last two years, we estimated a total of 4.069
Polish HD stores by the end of 2015. This, in turn, would represent about one
discount Polish store per 9.360, which is still above Europe’s major discount
markets (e.g. Germany, Austria or Denmark), with store densities of one per
2.500-7.000. Moreover, notice that we’ve assumed that Aldi will be opening an
average of 17 new stores each year, when it actually seems that they have taken
a step back in what concerns expansion plans in Poland.
Exhibit 35: # Stores in Polish HD Segment (Actual & Forecasts)
2008 2009 2010 2015E
Stores % Stores % Stores % Stores %
Biedronka 1.359 74% 1.466 72% 1.649 72% 3.000 74%
Lidl 308 17% 335 17% 400 17% 630 15%
Netto 157 9% 184 9% 200 9% 308 8%
Aldi 12 1% 40 2% 46 2% 131 3%
Total 1.836 100% 2.025 100% 2.295 100% 4.069 100%
Source: Company Data and Nova Research
There is margin for further store density growth in the Polish HD segment...
The Polish retail market is still far from being considered a mature market...
Source: Planet Retail and Nova Research
Source: Planet Retail and Nova Research
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PAGE 20/34
1.649
530
400
385
336
210
83
48
JM
Schwarz Group
Lidl
Tesco
Carrefour
Netto
Metro Group
Auchan
Exhibit 36: # Stores (Poland, 2011)
Thus, our analysis suggests that Biedronka faces a major opportunity to
consolidate its position in the Polish retail market. When put in the right
context, it turns out that JM’s expansion plans in Poland are far from being
utopian. Indeed, there is a solid track record, while Polish discount saturation
levels indicate that there is margin for further growth in terms of the number of
stores and we expect a convergence to modern store density standards only
after 2015. This process should be mainly driven by Biedronka, which was not
only the HD chain with the most ambitious expansion policy in the past recent
years, but also the one with the most clear and ambitious plans for the future.
ii. Assessing the competitive environment in Poland.
Biedronka’s profitable business and solid performance (ROIC estimated at 15%,
while the EBITDA margin at 8% and gradually increasing) often raises the
following question: how long will Biedronka be able to sustain its leading position
in the Polish Food Retail?
While this remains a valid point, first recall that the Polish Food Retail market is
already a very competitive and fragmented market. As previously shown,
Biedronka is the current leader in the Polish food-retail market (12%), above
some of the world’s retail giants such as: the Schwarz Group (7%), Tesco (7%)
or Carrefour (6%). Thus, there are major competitors already in Poland and, in
fact, they have been operating there for a long time, just like Biedronka23
.
As we’ve argued before, all retail formats have considerable margin for further
growth in the Polish market. Thus, it’s not easy to argue what is Biedronka’s main
threat. If we take into account size and geographical spread, then Tesco and
Carrefour are clearly the main perils. Since its first entrance in the Polish market,
Tesco started developing a leading position in the hypermarket format (with both
organic growth and M&A operations). Currently, it operates over 380 stores
(including different formats: discount, hypermarket and supermarket) and
intends to boost its pace of growth by opening about 100 new
supermarkets between this year and the following24
. Similarly, Carrefour also
started operating in Poland through its hypermarket chain, even though its
operations also comprise supermarkets and convenience stores (together, they
sum over 300 stores). Currently, its number one priority is to focus on its smaller
formats: the 5 Minut convenience stores and the Carrefour Express outlets. In
23 The Portuguese retailer decided to bet on the expansion of the Polish market in 1997, with the acquisition of 243 Biedronka stores; the
Schwarz Group decided to enter the Polish market under the Kaufland chain (2001) and then with Lidl (2002); Tesco entered Poland in 1995 through the acquisition of the Savisa SA chain; Carrefour in 1997; Auchan in 1996 via organic growth and the Metro Group also entered the Polish market first via organic growth under the Makro cash & carry chain (1994) and, later, under the Real hypermarket chain (1997).
24 A total investment of more than PLN0,5bn which should add to around PLN10bn that the company has already invested in Poland.
Source: Company Data and Nova Research
JM’s expansion plans in Poland are far from being utopian...
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PAGE 21/34
40%
36%
24%
17%
8%
7%
5%
5%
4%
3%
7%
Biedronka
Real
Tesco
Carrefour
Auchan
Spolem
Lidl
Kaufland
Netto
Makro
Other
Exhibit 37: What is the name of the shop you visit more frequently?
(September, 2009)
fact this strategy is already under way and, in 2010, Carrefour opened 50 new
outlets, while it also unveiled its intentions to open 200 new Carrefour Express
outlets each year, from 2011 onwards.
On the other hand, if we consider similar business strategies then, looking at the
discount chains established in Poland, we argue that Lidl is Biedronka’s main
competitor since it has been increasing its pace of growth accumulating 400
stores in 2010 (+19% yoy), while Aldi ended last year with just 48 stores, when it
seems that its strategy failed in Poland, and Netto has been decelerating its pace
of growth in terms of new store openings (210 stores by the end of 2010).
Concerning the last deal that was made in Poland, we regard it as a positive
development since the Zabka stores now belong to a UK-based PE firm, rather
than a direct trade competitor. Even though Zabka operates more than 2.000
stores in Poland, we don’t perceive as a threat to Biedronka (recall that this is
Poland’s largest convenience chain with smaller average size stores than
Biedronka: 60sqm vs 550sqm).
From this first analysis, we conclude that Poland’s competitive environment is
one of the most demanding in Europe, especially when we consider the
myriad of international players that have been and will continue struggling to
consolidate their position in the (yet to be mature) Polish retail market.
It is often argued that Biedronka might have benefited from the fact that both Lidl
and Aldi postponed expansion to Poland as they wanted a supermarket culture to
set up itself first. According to this view, it would be a matter of time before these
giants, with enormous economies of scale, decided to crush Biedronka profit
margins. However, we argue the “party” has been open for the past 15 years and
if Biedronka has had a huge success in the past recent years is not because
they allowed, but rather because they couldn’t prevent it. Moreover, if we
recall how large Casino, Tengelmann, Ahold and others once were in Poland, we
realize that scale is not everything. Indeed, this tells us that, throughout time,
Biedronka was the one that not only grew in size, but also, better understood
the needs of the Polish consumers and aligned its strategy in the Polish retail
market accordingly.
Polish consumers enjoy proximity/convenience as they prefer to go shopping,
mostly on foot, four-to-five times per week day and, even though they do value
quality, they are known to be extremely price conscious – recall that the Polish
per capita GDP is still well below the EU average. Thus, Biedronka’s high quality
products combined with its “every day low prices” policy – selling at a discount in
relation to Lidl (3-4%), supermarkets (8%), hypermarkets (15%) and traditional
Source: PMR Research
In the HD segment, Lidl is Biedronka’s main competitor and...
...we do not perceive the Zabka stores as a threat to Biedronka.
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PAGE 22/34
7,8%
7,9%
8,0%
8,1%
8,2%
8,3%
8,4%
0
5.000
10.000
15.000
20.000
20
10
20
11E
20
12E
20
13E
20
14E
20
15E
20
16E
20
17E
20
18E
20
19E
20
20E
Exhibit 38: Biedronka
Sales (€ mn) EBITDA Margin
retail (20%) – and a strong presence in more than 600 Polish towns and cities,
seems to be the strategy that best suits Polish customers’ needs. Indeed,
the proof that this is the adequate strategy, given the current economic and social
context, is the format diversification strategies that both Tesco and Carrefour
have been more recently adopting (after having failed with their hypermarket
chains), in line with Biedronka’s proximity strategy.
In the future, however, it is expected a significant increase in the Polish per
capita GDP, which means an improvement in life standards with rising consumer
spending and increased car ownership. In face of such scenario, there is often
the idea that Biedronka will no longer suit Polish needs as they will move away
from discount formats. Once again, we disagree with such view because, first of
all, discount chains have been quite successful in some countries with high
consumer purchasing power (e.g. Germany where Aldi and Lidl hold a 40%
share in the grocery food segment). Secondly, we focus the Group’s ability to
shape its strategy according to the environment where it operates. Recall that
Soares do Santos first arrived at Poland operating under the Eurocash stores in
1994. However, after analyzing the needs of the Polish consumers, the Group
realized that the discount format was the one that better suited that market.
iii. A sales CAGR of 12,5% and an EBITDA margin stabilizing at 8%. Is that
really sustainable?
If we look into past data, we observe that Biedronka has been clearly
outperforming the Polish Food Retail market. For instance, between 2005-2009
the former grew at a CAGR 28,9%, while the market posted a 9,6% CAGR. In the
future, we expect this tendency to be preserved: according to Datamonitor, the
Polish grocery/FMCG market is expected to grow at a 7-8% CAGR over
2009-2014E, while Biedronka is expected to grow at a 19,78% CAGR over the
same period. To support our view, we argue that Biedronka will take full
advantage of the Polish positive economic prospects, by continuing to execute
the most ambitious expansion plans of the Polish food retail market.
Even if Biedronka is able to grow at a double-digit CAGR until 2020, the major
suspicion among investors is Biedronka’s capacity to sustain an EBITDA margin
of 8% in the medium/long term. However, we’d like to recall that the EBITDA
margin of JM’s Polish operations improved gradually from 5,1% (2005) to 8,1%
(2010). This performance reflects Biedronka’s growing scale of operation but,
more importantly, its cost leadership in the Polish food distribution sector and
continuous search to improve efficiency, which allows it to preserve its price
leadership and to strengthen the operational margins. Furthermore, recall that
Source: Company Data and Nova Research
Biedronka understood the Polish customers and developed a strategy that best suits their needs...
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PAGE 23/34
last year’s operational results were achieved even with a price advantage over
Lidl in particular, but also supermarkets, hypermarkets and traditional retail.
Thus, we argue that Biedronka is safe against any attempt to increase
competition through prices. Additionally, we highlight the fact that, currently,
around 60% of Biedronka’s total sales refer to Private Label goods. Similarly to
Portugal, the perception concerning these types of products is changing and,
thus, we expect them to remain growing and increasing its share within
Biedronka, which will help strengthening both sales and the EBITDA margin.
Exhibit 39: Biedronka Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Net Sales & Services 4.807 5.813 6.856 7.778 9.185 10.833 15.573
EBITDA 392 477 562 646 762 899 1.246
EBITDA margin (%) 8,1% 8,2% 8,2% 8,3% 8,3% 8,3% 8,0%
Depreciation (86) (106) (127) (146) (174) (204) (248)
EBIT 305 371 435 500 588 695 998
EBIT margin (%) 6,3% 6,4% 6,3% 6,4% 6,4% 6,4% 6,4%
Source: Company Data and Nova Research
Conclusion: Biedronka owns a 70% share in the HD segment and is the current
leader of the Polish Food Retail market. In the future, we believe that Biedronka
will continue outperforming its competitors since it is the most popular and
the largest network of retail stores in Poland, with over 1.600 stores very well
positioned in both large cities and small towns, has an adequate strategy that
evolves according to the needs of the Polish consumers and, ultimately, has the
most ambitious (but feasible) investment plan for the future. High margins in
Poland could attract increased competition, but as we’ve argued, Biedronka is
already operating in one of the toughest European environments.
Expansion Plans: a brief note
We draw attention to the fact that JM is expected to unveil its expansion plans
to a 3rd
market this year. There has been much speculation on the matter and
we expect that this will be a value trigger for JM’s share. Even though there is no
certainty yet about the third location, the Group has already excluded the African
continent. The three main criteria set by JM consider: i) population size, ii)
political stability and iii) low corruption standards.
Apart from the location, there is no information of what kind of format will be
exported. Indeed, according to the company’s Investor Relations Office, the
concept will depend on the destination and, thus, it’s not clear whether JM will
export the Biedronka concept. Even though JM has spent time and energy with
the Ukrainian market, an eventual return to Brazil is not ruled out.
JM spend a lot of time studying the Ukrainian market, but an eventual return to Brazil is not ruled out...
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PAGE 24/34
Manufacturing
With the erosion of the Portuguese customers’ purchasing power, we expect
them to become even more price sensitive in the near future. Moreover, since the
perception concerning Private Label goods is changing25
, we forecast an overall
increase in the expenses associated with them, which should occur at the
expense of premium products and, thus, increase the competition faced by this
business unit. Therefore, we were very precautious in our forecasts, with sales
growing at a CAGR of 2,44% until 2020 (slightly above long-term inflation) while
the EBITDA margin should gradually decrease to 14%.
Exhibit 40: Manufacturing Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Net Sales & Services 236 238 240 246 252 259 300
EBITDA 34 34 34 35 36 37 42
EBITDA margin (%) 14,4% 14,3% 14,3% 14,2% 14,2% 14,2% 14,0%
Depreciation (3,1) (3,2) (3,3) (3,4) (3,5) (3,6) (4,1)
EBIT 31 31 31 32 32 33 38
EBIT margin (%) 13,1% 13,0% 12,9% 12,8% 12,8% 12,8% 12,7%
Capex 5,5 5,6 5,7 5,8 5,8 5,9 6,5
Source: Company Data and Nova Research
Services
These last two business units are the ones more exposed to economic
volatilities. Therefore, given the increasing difficulties to sell branded products
that we forecast, the Services business unit intends to enter alternative growth
channels/businesses and, simultaneously, to build leadership positions in the
Portuguese market for the represented brands. Thus, we also remain prudent
and, consequently, sales are expected to grow at a CAGR of just 2,66% until
2010, while the EBITDA margin is expected to remain constant at 1,7%.
Exhibit 41: Services Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Net Sales & Services 90 93 94 96 98 101 117
EBITDA 1,5 1,5 1,6 1,6 1,6 1,7 2,0
EBITDA margin (%) 1,7% 1,7% 1,7% 1,7% 1,7% 1,7% 1,7%
Depreciation (1,0) (0,9) (0,9) (0,9) (0,9) (0,9) (0,9)
EBIT 0,5 0,6 0,6 0,7 0,7 0,8 1,0
EBIT margin (%) 0,6% 0,6% 0,7% 0,7% 0,7% 0,7% 0,9%
Capex 0,6 0,6 0,6 0,6 0,6 0,7 0,7
Source: Company Data and Nova Research
25 Nowadays, the view that private labels are a low-cost alternative for national brands, normally with a low-quality associated to it, has
changed. Indeed, according to TNS Worldpanel data, private brands are in 100% of homes, while 95% of the Portuguese people that were questioned admitted that they will continue to purchase these brands.
Manufacturing and Services are JM’s business units most exposed to economic volatilities..
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PAGE 25/34
0
100
200
300
400
500
600
700
20
10
20
11E
20
12E
20
13E
20
14E
20
15E
20
16E
20
17E
20
18E
20
19E
20
20E
Exhibit 43: Capex Forecasts (€ mn)
Expansion Revamping Others
Capex and NWC
According to our model, Capital Expenditures (Capex) are divided in three main
categories: i) the expenses associated with new store openings, ii) the costs
related to the maintenance and refurbishment of all stores and iii) a third group
where we include other kind of costs relative to logistics, unexpected events and,
also, the conversion of the remaining Plus stores26
(see Exhibit 42).
Exhibit 42: Capex Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Expansion 201,5 382,4 436,1 388,7 603,6 613,9 93,6
Revamping 149,4 177,8 193,5 204,1 224,3 245,7 286,1
Others 83,4 84,4 67,4 80,0 59,0 87,1 84,9
Total 434,2 644,6 696,9 672,8 887,0 946,8 464,6
Source: Company Data and Nova Research
Even though we fully incorporated JM’s Polish expansion plans in our model, we
were a bit more cautious in what concerned Portugal. Not only because the
Portuguese Food Retail market is at a more advanced stage, but also due to the
recessionary environment that will impact negatively consumption in the following
years. Thus, in our expansion forecasts, we integrated JM’s aggressive target
of 3.000 Biedronka stores, by the end of 2015. In addition, we assumed that
the total number of revamped stores will converge to a value that represents 7%
(9%) of JM’s Biedronka (Pingo Doce) stores. Apart from that, we’ve also
considered other capital expenditures associated with unexpected events that
represent 0,20% of sales, for each business unit. We also incorporate in our
model JM’s intentions to restructure its Portuguese logistics network in the next
three years, assuming a 30% cost reduction with its DCs after 201327
. In Poland,
we relied on current figures which show that each Distribution Center (DC)
serves a target of 150-180 stores. We assume that this proportion will remain
valid in the future and since we expect JM to have a total of 3.375 Biedronka
stores by 2020, it should also have around 20 DCs.
After 2015, we expect a considerable deceleration of JM’s expansion plans,
especially in what concerns the Polish operations. However, since revamping
expenditures are expected to grow in proportion with the number of stores then,
according to our model, they will ultimately exceed expansion expenditures by
2016 (see Exhibit 43).
26 According to JM, out of the 18 former Plus stores left to be converted in Portugal, 8 are expected to be converted this year and the rest in
2012 – each store has an average conversion cost of €1,2mn. In Poland, the process of converting the former Plus stores was completed was already completed and took approximately 3 months due to the physical similarities between them and the standard Biedronka stores.
27 Recall that the company set the target of having four to five DCs, over the next three years (instead of the current seven).
Source: Company Data and Nova Research
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PAGE 26/34
15%3%
81%
Exhibit 44: Capex (2011-2013)
Retail Mainland
Recheio
Madeira
Biedronka
Manufacturing
Services
According to JM, the aggressive capex plan declared by the company for the
triennium 2011-2013 should amount to €1,7bn, of which more than ¾ to be
invested in Poland. Nevertheless, this seems an overly optimistic guideline once
compared to our own estimate – approximately, €2bn for the same time period.
In any case, our forecast concerning the Capex percentage assigned to
Biedronka (81%), throughout the same time period, is in line with JM’s forecasts.
Thus, clearly, this is the business unit that will canalize the biggest portion of the
company’s investment in the following years, while Retail Mainland and Recheio
should be allocated with substantially less (15% and 3%, respectively), during the
same triennium. Despite the aggressive expansion plan in Poland, we highlight
Biedronka’s sufficiently high scale and consolidated position that allows it to
totally finance the respective capital expenditures via Cash Flow generation.
Exhibit 45: Capex Breakdown by Business Unit (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E
Retail Mainland 115,5 102,5 107,2 97,1 93,1 95,4 98,9
Recheio 29,1 16,6 17,1 17,6 11,0 18,5 13,2
Madeira 12,6 2,4 2,5 2,5 2,6 2,6 2,9
Biedronka 270,9 516,9 563,8 549,2 773,9 823,6 342,5
Manufacturing 5,5 5,6 5,7 5,8 5,8 5,9 6,5
Services 0,6 0,6 0,6 0,6 0,6 0,7 0,7
Total 434,2 644,6 696,9 672,8 887,0 946,8 464,6
Capex/Sales 5,00% 6,54% 6,30% 5,51% 6,41% 6,01% 2,18%
Source: Company Data and Nova Research
We would still like to emphasize the improvements that have been made in some
of JM’s activity ratios, throughout time. This past performance associated with a
growing operational scale which should empower the company in its relations
with both suppliers and customers, gives us confidence for the future. Thus, we
are optimistic on a continuous improvement as we expect the Group to receive
from customers in 7 days, while paying to its suppliers in 97 days, by 2020.
Simultaneously, the inventory period should continue to fall (until 17 days) as the
percentage of perishables in total sales gradually increases.
Exhibit 46: Net Working Capital Breakdown 2006 2007 2008 2009 2010 2020
Average Inventory Period 25,6 23,8 22,6 22,2 18,2 17,0
Average Collection Period 11,7 10,4 8,6 9,1 7,8 7,0
Average Payment Period 107,1 107,4 100,4 102,4 97,6 97,0
Source: Company Data and Nova Research
Source: Company Data and Nova Research
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PAGE 27/34
3,0%
3,3% 3,3%3,3%
3,4%
Ger
man
y
Net
her
lan
ds
Fin
lan
d
Fran
ce
Au
stri
a
Exhibit 47: 10-year Gov. Yields
SOTP Valuation
In order to obtain a price target that reflects JM’s fundamental value, we decided
to use a Sum-of-the-Parts (SOTP) Valuation. We believe that this is the most
accurate approach since JM is not only present in different regions (Poland,
Portugal mainland and Madeira) – thus, being subject to different economic
environments, market conditions and corporate tax rates – but also operates in
different segments (hard discount, cash & carry, supermarket, industry and
Services) and holds different stakes in each of its business units.
Therefore, we have evaluated the fundamental value of each of JM’s six
business units using the Discounted Cash Flow (DCF) method. Moreover, we
decided to compute the Free Cash Flows for the Firm (FCFF) for each of JM’s
business units, according to each local currency. Consequently, since FCFF
represents the Cash Flows available to all the firm’s investors (bondholders and
shareholders), we had to discount them to the present using a Weighted
Average Cost of Capital (WACC)28
, i.e. a cost of capital that takes into account
both sides of financing (equity and debt).
i. Cost of Equity ( )
In order to estimate the cost of equity, we relied on the Beta Approach29
. In this
way, we’re assuming that JM’s exposure to country risk is proportional to its
exposure to all other market risk, measured by beta.
Given the impossibility of finding a riskfree investment, we resorted to the most
common proxy: ten-year government bonds. Furthermore, recall that the
currency in which cash flows are estimated has to be consistent with the riskfree
rate we choose. Bearing this in mind, we computed a riskfree rate in Euros
(Portugal) and another one in Zlotys (Poland). For the first case, we considered
the entire set of Aaa rated countries in the Euro zone (the standard for a default
free country) and, our final decision was based on the one with the lowest ten-
year Government yield – on May 27, 2011, that was Germany. We couldn’t,
however, use the ten-year yield on the Polish government bonds directly, since
this rate has a default spread incorporated30
. Consequently, we estimated a
default spread for Poland, through the difference between the yield of the Polish
28
(1 ).
29 . 30 According to Moody’s, Poland has an A2 rating since November 2002, which suggests a higher risk of default than an Aaa rating.
Source: Bloomberg
We decided to use a Sum-of-the-
Parts (SOTP) Valuation...
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PAGE 28/34
ten-year Government bonds denominated in Euros31
and the (default free)
German ten-year yield, to arrive at a riskfree rate in Zlotys32
.
In order to estimate a Mature Market Equity Risk Premium, we opted for the
standard Historical Premium Approach, i.e. we decided to look into historical
returns of stocks and compare it with the returns earned by bonds, and use this
historical premium as a forecast for the future risk premium. For this, we decided
to compute the risk premium for the U.S., because it’s an equity market we deem
mature and there is more information available, once compared to Emerging
economies or, even, Western European countries. Thus, using the S&P 500 as a
proxy for the market return and the ten-year U.S. Government Bonds as the
riskfree rate, we computed the historical risk premium in the U.S. from 1928-
201033
. Afterwards, we proceeded with the estimation of both the Portuguese
and Polish Additional Risk Premiums34
by considering each country default
spread (the computation of the Portuguese default spread was similar to the
Polish one) adjusted for the volatilities of both the Equity Index and the country’s
ten-year bonds, using two years of daily data.
In what concerns the company’s Beta, we first selected a sample of eighteen
firms35
that we perceived to capture best some of JM’s most important features.
Besides operating in the Food Retail industry, all of these companies are also
present in either Western or Central/Eastern Europe (some in both). We then
regressed the returns of each stock against the returns of local indices, using
three years of weekly data. After unlevering all betas36
, according to each
company’s marginal tax rate and debt to equity ratio, we finally took a simple
average of all the unlevered betas and adjusted it to our target of JM’s long-term
debt to equity ratio (60%) – in this way, by estimating a Bottom-Up Beta for JM,
we were able overcome the large standard errors associated with simple
regression betas37
and, thus, to compute a more precise estimate.
ii. Cost of Debt ( )
We’ve updated our initial estimate for JM’s Cost of Debt. Given that JM is not
rated and has no widely traded bonds outstanding, we decided to estimate its
31 We cannot compare interest rates on bonds denominated in different currencies. 32 . 33 We preferred to use a wider time period to avoid larger standard errors associated with our risk premium (even though we recognize that
by using shorter time periods we obtain a more updated estimate, as the levels of risk aversion are likely to change over time). 34 . 35 Some of these companies are further analyzed in this report (see the Comparables chapter). 36 1 (1 ) ( ) . 37 The SE from JM’s regression Beta yielded 10,81%, while the SE of the average Beta yielded substantially less: 2,29%. The latter was
approximated as follows: , where is the number of firms in our sample.
We resorted to the standard Historical Premium Approach, in order to compute a Mature Market Risk Premium...
Additional Risk Premiums reflect each Country Default Spread, adjusted for the volatilities in both the Equity Index and the 10-year Government Bonds...
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Cost of Debt in such a way that it could reflect the recent rise of the EU
Sovereign yields but, at the same time, JM’s strong balance sheet. Thus, we
selected a first group composed by the main Portuguese companies with
sufficiently liquid bonds, to capture the Portuguese economic reality. However,
we perceived this first group’s average cost of debt as being too penalizing for
JM taking into account that, from 2008 onwards, the firm has been consistently
reducing its level of debt (see Exhibit 48) and, moreover, considering its past
Average Cost of Debt set at 4,32% (2005-2009).
Exhibit 48: Leverage Position Breakdown 2005 2006 2007 2008 2009 2010
Net Debt (€mn) 497,4 506,2 579,3 845,9 692,0 577,5
Gearing 74,2% 66,0% 67,0% 90,8% 64,9% 51,0%
Average Cost of Debt 3,3% 3,8% 4,8% 5,7% 4,0% -
Interest Coverage Ratio 4,50 5,00 3,79 3,70 5,11 6,80
Source: Company Data and Nova Research
Thus, we also have incorporated in our analysis some of the major European
companies operating in the same industry as JM that are not (as much) affected
by the Portuguese market volatilities and, as well, benefit from a strong financial
position. In the end, we weighted both estimates in order to achieve an estimate
that, in our view, better reflected JM’s current situation, within a negative
macroeconomic outlook38
. We summarize all of our DCF assumptions below.
Exhibit 49: DCF Assumptions Portugal Madeira Poland
Riskfree Rate 2,99% 2,99% 4,4%
Mature Market Premium 4,31% 4,31% 4,31%
Country Risk Premium 6,44% 6,44% 4,15%
Beta Unlevered 0,531 0,531 0,531
Target D/E 60% 60% 60%
Tax 26,50% 25% 19%
Beta Levered 0,765 0,770 0,789
Cost of Equity 11,21% 11,26% 11,10%
Pre-tax Cost of Debt 7,10% 7,10% 7,20%
After-tax Cost of Debt 5,22% 5,33% 5,83%
D/(D+E) 37,50% 37,50% 37,50%
WACC 8,96% 9,03% 9,1%
Source: Nova Research
We’d still like to emphasize that we have assumed that the Terminal Growth
Rates concerning all the Portuguese business units are in line with the expected
annual long-term inflation rate of 2%. On the other hand, we were a bit more
38 As of 2010, 11,9% of the Group’s Net Debt were denominated in Zlotys – after discussing with the company’s Investor Relations Office, we
assumed JM’s Cost of Debt in Poland to be 10 bps higher.
We have updated our initial Pre-tax Cost of Debt (5,77%) to 7,1%, reflecting Portugal’s deteriorating macroeconomic environment...
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PAGE 30/34
optimistic in what concerned the Polish operations due to the country’s growth
potential and the retail market’s embryonic stage (as compared to the
Portuguese one). Thus, we assume a 0,5% real perpetuity growth rate.
The final results of our SOTP Valuation are shown below. As we can see, our
price target FY11 was revised downwards to €15,21 from €15,54, as a
consequence of our updated figures that incorporate the current Portuguese
macroeconomic scenario. Nevertheless, we keep the Buy recommendation,
with a 17,7% upside vs current price.
We also highlight the fact that Biedronka increased its weight in our SOTP
Valuation to 81% EV from 74%, as a consequence of a much better
macroeconomic environment and higher growth prospects in the retail sector.
Indeed, the reason why our new WACC for the Portuguese operations didn’t
impact more severely our Price Target has to do with the fact that JM is getting
increasingly more levered to the Polish economic reality.
Exhibit 51: Sum-of-the-Parts Valuation39
Sum of the Parts (€ mn)
EV Stake Attributable to JMT % Total WACC ROIC
Retail Mainland 1.301 51% 663 12,16% 8,96% 10,42%
Recheio 361 100% 361 3,38% 8,96% 8,58%
Madeira 39 75,5% 30 0,37% 9,03% 6,66%
Biedronka 8.713 100% 8.713 81,44% 9,12% 14,63%
Manufacturing 276 100% 276 2,58% 8,96% 12,04%
Services 9 100% 9 0,08% 8,96% 3,29%
Enterprise Value
10.053
Consolidated Net Debt
(616)
Debt Attributable To Minorities
135
Equity Value
9.571
# Shares
629
Price Target (€)
15,21
Source: Company Data and Nova Research
According to our assessment, most of JM’s business units are creating value for
the Portuguese retailer (i.e. ROICs exceed WACCs). Even with the aggravated
conditions in Portugal, there are three Portuguese business units with a
sufficiently large ROIC that compensate our new WACC estimate. The
exceptions are the Madeira and Services business units which are not creating
value for JM (however, we argue that this does not represent a major concern for
the Group, as they account for just 0,45% of JM’s EV).
39 The results reported by JM, concerning the Manufacturing business unit, already take into account the Group’s 45% stake.
Exhibit 50: Terminal Growth Rates
Portugal
Perpetuity Growth Rates 2,0%
Real Perpetuity Growth Rates 0,0%
LT Inflation 2,0%
Poland
Perpetuity Growth Rates 3,0%
Real Perpetuity Growth Rates 0,5%
LT Inflation 2,5%
Source: Nova Research
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Comparables
We decided to check if our Sum-of-the-Parts Valuation was in line with a
comparison valuation based on Multiples. Given JM’s unique profile in the retail
sector, we decided to obtain information regarding comparable companies
operating in i) Western Europe (exposed mainly to mature markets that resemble
the Portuguese and, thus, subject to limited growth rates) and in ii) Central and
Eastern Europe (which are exposed to retail markets that exhibit significant and
greater growth prospects that resemble Poland). We proceeded with the
analysis, using the same weights we had estimated before (see Exhibit 51).
Exhibit 52: Food Retail Comparables
Market Cap (€mn) Sales (€mn) EV/Sales EV/EBITDA
2010 2010 2010 2011E 2012E 2010 2011E 2012E
Colruyt SA (COLR) 6.108,27 6.752,60 0,77 0,90 0,84 8,72 9,96 9,28
Delhaize Group SA (DELB) 5.612,96 20.850,00 0,36 0,35 0,34 4,71 4,63 4,38
Carrefour SA (CA) 21.746,25 90.099,00 0,36 0,33 0,32 6,22 6,00 5,43
Casino Guichard Perrachon SA (CO) 8.054,65 29.078,00 0,50 0,44 0,41 7,91 6,41 5,81
Metro AG (MEO) 17.559,67 67.258,00 0,32 0,32 0,30 6,37 5,54 5,03
Koninklijke Ahold NV (AH) 11.771,08 29.530,00 0,42 0,41 0,39 5,71 5,43 5,17
WM Morrison Supermarkets PLC (MRW) 8.166,36 16.479,00 0,56 0,47 0,50 7,12 6,39 6,67
J Sainsbury PLC (SBRY) 6.852,46 22.528,50 0,39 0,40 0,37 6,74 6,36 6,33
Tesco PLC (TSCO) 37.384,42 64.173,38 0,75 0,67 0,64 9,57 8,52 7,45
Mature Markets AVG 13.695,12 38.527,61 0,49 0,48 0,46 7,01 6,58 6,17
Magnit OJSC (MGNT) 8.828,41 5.874,54 1,51 1,14 0,83 20,65 15,12 10,74
X5 Retail Group NV (FIVE) 6.045,06 6.268,48 1,42 0,84 0,66 18,92 11,46 8,78
BIM Birlesik Magazalar AS (BIMAS) 3.861,23 3.293,37 1,17 0,93 0,77 21,66 17,52 14,62
Migros Ticaret AS (MGROS) 2.535,92 3.188,75 1,06 0,74 0,65 18,96 14,45 11,67
Emergent Markets AVG 5.317,66 4.656,29 1,29 0,91 0,73 20,05 14,64 11,45
Weighted AVG - - 1,14 0,83 0,68 17,63 13,14 10,47
Jeronimo Martins SGPS SA (JMT) 7.173,94 8.691,00 0,92 1,02 0,91 12,45 13,38 11,86
Source: Bloomberg and Nova Research
As we can see in Exhibit 52, looking at the EV/EBITDA multiple, JM is trading at
a premium once compared to its Western European peers which we believe
to be justifiable given Biedronka’s strong growth potential and a business plan
that has been consistently implemented throughout time (greater focus on its
strongest assets). On the other hand, we may also observe that the exact
opposite occurs once we consider JM’s Emerging peers, which is explained by
the fact that these retailers are operating almost exclusively in Emerging markets,
thus being subject to a much greater growth potential.
We emphasize the fact that, had we use the EV/EBITDA multiple and we would
have obtained a Price Target of €14,8 (2,69% less compared to our target),
which is in line with our Sum-of-the-Parts Valuation.
JM is trading at a premium with
its Western European peers...
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PAGE 32/34
Financial Ratios 2010 2011E 2012E 2013E 2014E 2020E
Growth & Margins
Sales 18,8% 13,4% 12,3% 10,4% 13,2% 5,5%
EBITDA 23,6% 15,1% 12,8% 12,0% 13,9% 5,6%
EBITDA Margin 7,5% 7,6% 7,7% 7,8% 7,8% 7,7%
Net Profit 34,3% 25,0% 14,6% 13,5% 15,2% 6,3%
Liquidity
Current Ratio 0,41 0,46 0,46 0,48 0,48 0,70
Quick Ratio 0,24 0,29 0,29 0,32 0,32 0,55
Cash Ratio 9,5% 11,4% 11,4% 12,9% 13,1% 25,8%
Working Capital (1.314) (1.429) (1.611) (1.729) (1.976) (2.558)
Leverage
Debt/Assets 20,5% 18,5% 18,7% 19,1% 19,1% 19,5%
ST Debt/Total Debt 25,7% 15,0% 15,0% 15,0% 15,0% 15,0%
LT Debt/Total Debt 74,3% 85,0% 85,0% 85,0% 85,0% 85,0%
Debt/Equity 75,4% 60,0% 60,0% 60,0% 60,0% 60,0%
Financial Leverage Ratio 3,67 3,24 3,21 3,14 3,13 3,07
Interest Coverage Ratio 6,80 8,46 8,83 8,81 8,91 8,85
Activity
Total Asset Turnover 2,09 2,06 2,06 2,04 2,04 2,04
Average Inventory Period 18,19 18,00 18,00 17,50 17,50 17,00
Average Payment Period 97,56 97,50 97,50 97,50 97,50 97,00
Average Collection Period 7,82 7,50 7,50 7,50 7,20 7,00
Capex/Sales 5,0% 6,5% 6,3% 5,5% 6,4% 2,2%
Capex/Assets 10,4% 13,5% 12,9% 11,2% 13,1% 4,4%
Profitability
Return on Sales 5,3% 5,5% 5,5% 5,7% 5,8% 6,0%
ROA 6,8% 7,3% 7,4% 7,6% 7,7% 8,2%
ROE 24,8% 23,5% 23,8% 23,8% 24,2% 25,0%
Pre-tax ROIC 23,8% 25,6% 25,5% 25,8% 26,4% 30,5%
Valuation
EV/EBITDA
13,38 11,86 10,59 9,30 6,09
EV/Sales
1,02 0,91 0,82 0,73 0,47
EV/EBIT
18,65 16,41 14,47 12,60 7,83
P/E
27,56 23,94 21,11 18,26 11,21
Dividend Yield (%)
50% 50% 50% 50% 75%
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PAGE 33/34
Financial Statements (€ mn) BALANCE SHEET 2010 2011E 2012E 2013E 2014E 2020E
Tangible assets 2.193 2.591 3.016 3.400 3.955 5.247
Intangible assets 863 867 872 862 864 1.139
Other non-current assets 199 234 271 304 353 465
Total non-current assets 3.256 3.692 4.158 4.567 5.172 6.851
Inventories 369 395 440 477 539 797
Trade debtors, accrued income and deferred costs 182 209 231 249 281 404
Cash and cash equivalents 212 271 307 379 440 1.330
Other current assets 141 222 251 310 360 1.088
Total current assets 903 1.097 1.228 1.416 1.620 3.620
Total assets 4.159 4.789 5.387 5.983 6.792 10.471
Share capital 629 629 629 629 629 629
Retained earnings 136 483 683 910 1.172 2.413
Others 80 80 80 80 80 80
Minority interests 287 287 287 287 287 287
Total Shareholders’ equity 1.132 1.479 1.679 1.906 2.168 3.409
Borrowings 634 754 856 972 1.106 1.739
Other non-current liabilities 168 168 168 168 168 168
Total non-current liabilities 802 923 1.025 1.140 1.274 1.907
Trade creditors, acrued costs and deferred income 1.895 2.130 2.393 2.613 2.982 4.579
Borrowings 219 133 151 172 195 307
Other current liabilitites 110 124 139 152 173 268
Total current liabilities 2.225 2.387 2.683 2.937 3.350 5.155
Total liabilities 3.027 3.310 3.708 4.077 4.624 7.062
Total Shareholders’ equity and liabilities 4.159 4.789 5.387 5.983 6.792 10.471
INCOME STATEMENT 2010 2011E 2012E 2013E 2014E 2020E
Net Sales & Services 8.691 9.860 11.070 12.220 13.839 21.325
EBITDA 653 751 848 949 1.081 1.651
EBITDA margin 7,5% 7,6% 7,7% 7,8% 7,8% 7,7%
Depreciation (191) (212) (235) (255) (284) (367)
EBIT 462 539 613 695 798 1.283
EBIT margin 5,3% 5,5% 5,5% 5,7% 5,8% 6,0%
Financial Results (68) (64) (69) (79) (90) (145)
Non Recurrent Items (15) 0 0 0 0 0
EBT 379 475 543 616 708 1.138
Income Tax (79) (101) (114) (129) (147) (233)
Net Income 300 375 429 487 561 905
Minority interests (19) (27) (29) (33) (37) (51)
Net Income attributable to JM 281 347 400 453 524 854
Dividends (222) 0 (200) (227) (262) (640)
Additions to Retained Earnings 59 347 200 227 262 213
CASH FLOW STATEMENT 2010 2011E 2012E 2013E 2014E 2020E
Operating Profit 462 539 613 695 798 1.283
Depreciation 191 212 235 255 284 367
Net Interest Expenses (83) (64) (69) (79) (90) (145)
Income Tax (80) (101) (114) (129) (147) (233)
△ NWC 239 115 182 118 247 57
Cash Flow from Operations 728 701 846 860 1.091 1.330
Net Capex (387) (645) (697) (673) (887) (465)
Other Changes in Investments (28) (4) (4) 9 (2) (127)
Minorities (19) (27) (29) (33) (37) (51)
Cash Flow from Investment (434) (676) (731) (697) (926) (643)
Dividends paid (222) 0 (200) (227) (262) (640)
Increase/Decrease in Loans (27) 34 120 136 157 128
Others 0 0 0 0 0 0
Cash Flow from Financing (249) 34 (80) (91) (105) (512)
Initial Cash 167 212 271 307 379 1.155
△ Cash 45 60 36 72 61 175
Ending Cash 212 271 307 379 440 1.330
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PAGE 34/34
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by a Masters of Finance student, following the Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The NOVA School of Business and Economics does not deal for or otherwise offers any investment or intermediation Services to market counterparties, private or intermediate customers. This report is not an investment recommendation as defined by Article 12.º-A of the Código do Mercado de Valores Mobiliários. The students of NOVA School of Business and Economics are not registered with Comissão do Mercado de Valores Mobiliários as financial analysts, financial intermediaries or entities or persons offering any Services of financial intermediation, to which Regulamento 3.º/2010 of CMVM would be applicable. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.