FOURLIS | Primed for sweet operating leverage
Leverage effects kicking in – Q2 was indicative of the size of the leverage in the business, with quarterly sales returning close to pre-COVID levels and EBITDA shaping ahead of Q2’19 levels despite lower gross margins. Although Q2 numbers were partly boosted by non-recurring subsidies (€4m), it seems that trading is close to normalization (July-Aug sales similar to 2019 levels). Along with the normalization of the top line, we expect positive leverage to become more pronounced in the coming quarters and be further underpinned by tax/financial savings, thereby filtering through to significant improvement in the bottom line. With the share price still c25% below pre-pandemic levels, operating momentum likely to stay positive and the establishment of the REIC primed to unlock the value of the real estate, we advocate looking through near term volatility, reiterating our Buy recommendation.Top line on a normalizing path but we are keeping conservative assumptions in 2021 – Q2 2021 was a positive surprise, with the top line returning very close to pre-COVID levels. Looking ahead, the constantly evolving virus landscape certainly limits visibility, but on the positive side there has been no discernible fall in spending on the high-street or any shift in consumer appetite to socialize. Against this background, we have edged a bit higher our 2021 top line estimates effectively filtering through the H1 beat, but we still use quite conservative assumptions, envisaging Q3 sales shaping c3% below pre-COVID levels and Q4 coming in c8% below the respective 2019 mark. Overall, we expect group 2021 revenues to shape c8% below 2019 levels (on c3% higher capacity) and EBITDAaL to remain c18% off its pre-COVID level. We anticipate full return to normalcy in 2022.
New avenue of growth in the guise of capacity additions – Capacity-led growth has returned at the core of the investment case, with mgt aiming for 4 new medium sized and 5 small IKEA stores in the next four years. Following the opening of the IKEA medium-sized store in Varna and the mini store in Piraeus in 2020, Fourlis is poised to add a city store in Sofia in Sep’21 and a city store in Athens (at The Mall) in November. Overall, we expect capacity-led growth of 9-10% vs 2019 levels (by 2022), which means there is scope for positive earnings surprises in the coming years given our conservative top line assumptions (sales densities remaining well below 2019 levels). Assuming pre-tax IRRs in the high-teens, we estimate the value creation from each new mini store could exceed €0.10-0.15 per share.
Valuation – We reiterate that the upcoming REIC demerger will unlock the value of Fourlis’s real estate through tax benefits and, particularly, re-rating of the rental income within the REIC. We value the group on a SOTP basis, namely splitting the group into the REIC component and the residual business containing the operations. Our PT (10% discount to NAV for the REIC, DCF at 8.8% WACC for the OpCo) stays unchanged at €6.2 per share.
Co. is engaged in the manufacture, import and distribution of electrical household appliances and the manufacture of FOURLIS kitchen hoods. In addition, through a subsidiary, Co. is engaged in the operation of a retail chain.
Eurobank Equities is a Greek-based firm offering research, sales and trading services to institutional, corporate and private clients. The company is wholly owned by Eurobank, one of the 4 systemic banks in Greece.
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