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Jumbo | Fundamentals will prevail

In our new note on Jumbo we argue that the disconnect between the fundamentals and the share price is looking exaggerated at the current share price levels, with Jumbo’s valuation discount vs. EU retailers standing at a 2-year high. We also contend that Jumbo is poised to screen as even more attractive than EU peers post the IFRS16 implementation, as it appears less vulnerable to IFRS 16 restatements than other retailers thanks to the ownership of a significant amount of its store network. Our report lays out the positives of the investment case, while also looking at the things that might go wrong.

We also seek to “separate the wheat from the chaff”, arguing that although there are several aspects of Jumbo’s corporate governance that deviate from best practice, investors should take comfort in the solid business model, property backing, long-history of FCF generation, healthy balance sheet and Big-6 auditing.

As for the short-term outlook, we make the case that the cost environment for FY19 looks relatively settled, and we thus do not see a reason why Jumbo will not deliver a respectable 8% bottom line growth.