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JUMBO | The beat goes on

Momentum unfettered; set to deliver >6% operating profit growth in 2022e… – Jumbo managed to navigate the tricky backdrop remarkably well in 2022 delivering +14% sales growth, smashing initial mgt guidance (+5%) and our estimates (+7%). FY22 sales even exceeded the most recent guidance communicated by management in December (c+13%) as the holiday season proved very strong (Dec sales +22%). Even more importantly, EBITDA in the 9M’22 increased +9% yoy, an impressive performance given the flurry of headwinds (cost pressures, squeeze in consumers’ disposable income), as price/mix offset the uptick in costs. On our new estimates (2022e EBITDA raised 10%) Jumbo is primed for >6% yoy EBITDA growth in 2022, delivering operating profits >25% higher than the 2019 levels.

… and to further grow profits in 2023e – With 2022 constituting the peak of inflationary pressures due to a trifecta of factors (freight rates, input cost inflation, FX), it was just a matter of time until base effects kicked in. In fact, the latest data indicate a faster normalization of base effects than we had in mind, with: 1) shipping costs down to pre-pandemic levels in the first few days of 2023; 2) the USD past its peak strength (and looking poised to weaken vs the EUR given the tightening cycle); 3) retreating producer prices in China (PPI decline in October-November) and normalization in raw material prices (e.g. polyethylene). Against this background, 2023 prospects look better than consensus implies (EBITDA €310m), with our new estimates now calling for FY23 EBITDA in excess of €330m. In fact even this estimate, which implies just +2% operating growth yoy, conservatively incorporates an 80bps gross margin contraction and modest cost deleveraging from wage inflation.

Jumbo’s playbook for protecting/growing profits – Between 2021 and Q2 2022 our main concern was that Jumbo’s profits would be de-based owing to inflationary pressures (especially transport costs) and would stay somewhat depressed due to a “higher-for-longer” cost environment. Jumbo navigated this tough backdrop better than we had imagined thanks to its unique playbook: wide assortment, dollar store concept and price/mix management. Looking beyond 2023, we have raised our 2024e EBIT 13%, as we incorporate more robust EBIT margins than before (near 28%, higher than the c26%-27% in the period pre-COVID) and thus expect profits to remain on an upward trajectory after just a temporary de-basement in 2020.

10-14% earnings upgrades, reiterating as top pick – Filtering through the upgrade to our estimates, we have raised our PT to €19.5. The latter is predicated on a DCF (WACC 9.9%) and places Jumbo at 6.4x 12m EV/EBITDA, still small discount vs its LT average (due to the lower growth profile). As we argued in our last detailed report, 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 retail peers) is discounting a very pessimistic setup. Given the upside risk to our very conservative 2023-24 estimates, we see the stock as sufficiently de-risked and see defensive appeal in a precarious market context, given the strong balance sheet and the extra support offered by a c5-6% dividend yield.