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JUMBO | High confidence, lingering uncertainties

Solid execution in 2021… – Jumbo has announced it has delivered sales of €832m in 2021, +19.9% yoy and just 2% below pre-COVID levels, quite a resilient performance in the context of the multiple COVID-induced headwinds faced during the year. More importantly, with EBIT up c27% in the 9M period, we expect FY21e EBIT to settle c35% higher yoy (+2% vs 2019 levels) on account of resilient gross margins (helped by destocking) and tight cost monitoring. Jumbo’s 2021e EBIT is thus poised to shape c12% higher than we had anticipated last year (April 2021).

… but battling multiple headwinds in 2022 – That said, Jumbo has significant risks to navigate this year, facing a trifecta of headwinds in the face of: 1) persistently high freight rates as supply chain bottlenecks continue through H1’22; 2) rising cost inflation related to imported goods (e.g. plastic, labour in China); 3) FX due to the weakening of the EUR against the USD and CNY. We estimate Jumbo will face c10% COGS inflation in 2022, which would translate into a mid-teens impact on operating profit ceteris paribus. Mitigating the aforementioned effect will be the recovery in sales (and the resulting positive operational leverage) as well as our assumption for slightly positive price/mix. As a result, we model a c9% decline in group EBIT for 2022, anticipating a number in the €212m area, namely c7% below 2019 levels.

… and potentially facing a “higher-for-longer” cost backdrop – Jumbo has a long track record of beating street estimates thanks to stronger sales and margins. However, with 2022 marking the worst inflationary environment the company has had to contend with in its recent history, we believe it may take several quarters of margin resilience to quell investor concerns about 2022 margins. In addition, given the supply-demand balance in container shipping in the coming years, we believe it is reasonable to expect “higher-for-longer” freight rates, as reflected in consensus estimates for Maersk. We have thus recalibrated our estimates for Jumbo, now modelling unit shipping costs c20% higher than pre-COVID levels through to 2025e (in sync with Maersk consensus loaded rates), which will usher in a period of weaker margins than those prior to 2019 (EBIT margin 24-25% from 26-27% pre COVID).

Valuation – Having materially derated due to COVID-related setbacks and cost inflation concerns for 2022, the stock is close to its steepest discount to EU sector peers in years. The – sometimes overly – downbeat message communicated by mgt coupled with the recent pullback in the shares makes us sharpen our pencils for 2022 as an entry opportunity seems to be emerging. At the current juncture however, we retain our Hold, as our positivity about the fundamentals is restrained by lack of visibility around near term profitability, the key person risk and long-term concerns regarding Jumbo’s ability to retain its competitive advantage. Our PT (DCF-based at 9.9% WACC) has been lowered mainly due to c8-9% EBITDA downgrades for 2022-23e, effectively placing Jumbo at c6.5x 12m fwd EV/EBITDA, in line with the group’s historic average valuation.