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JUMBO | “Like a plane, rather than like a rocket” … and that’s ok

Impressive execution; just limited debasement in profitability in 2022-23e – Jumbo posted a stellar 2021, managing to generate sales just 2% below 2019 levels and, most importantly, to deliver record-high operating profit (on record gross margins). The provision of guidance for 2022 made the near term outlook – a focal point for investors – less foggy, as mgt pointed to a manageable yoy decline in net profit (10-20%) with consensus already at the low end of the range. Execution y-t-d remains robust (H1’22 net profit +17% yoy) with healthy top line dynamics (8M sales +11%). Abating transport cost pressures are offset by FX-related inflation but the end result is better than included in our previous calculus. Our recalibrated 2022e (EBITDA lifted by c14%, net profit +18%) are c5-6% above the upper end of the guidance.

… but valuation remains subdued – The shares were rebased higher by c€2 in April (FY21 results release) but retreated again recently as investors continue to digest the near term outlook and the impact of the tighter monetary settings. From a valuation perspective Jumbo has de-rated markedly, as it stands near its levels a year ago while fwd estimates have increased materially. Reasons for the share price falling behind the progression of earnings are, in our view: 1) the “higher-for-longer” cost backdrop; 2) concerns about the long-term sustainability of Jumbo’s competitive advantage in a digitizing world; 3) considerations such as key person risk putting upward pressure on risk premia. The – sometimes overly – downbeat message communicated by mgt has in the past been an additional reason for a disconnect between fundamentals and valuation, while the positive signaling associated with the institution of a share buyback program (announced in April) has been diluted by the low level of the buyback price range (€13.5 max price).

Jumbonomics vs “higher-for-longer” costs – The combination of high gross margins (>50%) and high store productivity have driven strong EBIT margins (26-27%). Although 2022 marks the worst inflationary environment the company has had to contend with, the pillars of the business model – wide assortment, low prices, mix management – underpin very solid economics partly offsetting inflationary pressures. Looking ahead, although we stick with our assumption for a “higher-for-longer” cost backdrop, our recalibrated 2023-24e EBIT have been lifted 7-8%, as we incorporate more robust EBIT margins (near 26%), in sync with the historic average. We effectively expect Jumbo to manage to deliver EBIT c10-13% above pre-COVID levels in 2022-23e, quite a solid performance given the flurry of headwinds.

Raise to Buy, add to top picks – Our new PT places Jumbo at 6.3x 12m EV/EBITDA, still 10% discount vs the LT average. With the business being run “like a plane, rather than like a rocket”, the investment case looks less exciting than in the past, but the valuation (c35% EV/EBITDA discount vs EU retail) is also reflective of a more tepid outlook. Following the estimate upgrades, we see a more attractive bull-bear skew and raise Jumbo to Buy, while adding it to our top picks. We caveat though that the price is likely to move in lockstep with sentiment and, as such, communication on short-term dynamics has to be consistent and well-balanced.