EUR 407.14 For Business Accounts Only

Set to chart another record year

2017: temporary pushback on gross margins – Jumbo’s performance in H2’17 was weighed down by the slowdown of domestic sales run rates (+0.9%) and the enfeebled gross margin (-150bps yoy) as a result of the substantial increase in transport costs. That being said, we argue that investors should not conclude that cracks are forming in Jumbo’s margins. On the contrary, in FY18e Jumbo is not only faced with a more benign macroeconomic backdrop in Greece and unfettered growth abroad – as reaffirmed by the 12% group revenue growth delivered in Q1’18 – but it is also set to benefit from the recent strengthening of the EUR against the USD. The impact from the latter is likely to more than offset the ongoing headwind from higher transport costs, thereby underpinning gross margins (EE +30bps).

 2018: acceleration of revenue run rates and resilient margins = strong EPS growth – Management has guided for 6-9% sales growth in FY18e and for flat net profits due to the headwind from higher transport costs. Our 8% revenue growth projection is at the high end of the guided range but we are more optimistic on margins, anticipating EBITDA and net profit growth of c11%. We remind investors that Jumbo has consistently outperformed both the guidance and our own projections (FY17 actual numbers came in c8% above initial guidance and c2% above our estimate in Oct’16). This instills us with confidence that Jumbo will deliver net profit growth >10% in FY18e.

“Jumbonomics” – Jumbo enjoys high returns as a result of the combination of robust gross margins and high store productivity. With the expansion plan continuing at full speed, mgt seems to be trying to adhere to strict hurdle rates on investment targeting a payback period as short as two years for new stores in Romania. At group level, store metrics seem to validate the observation of healthy returns on capital, with our estimates pointing to a payback period less than 5 years and IRR close to 20% over a 10-year period. The high store profitability substantiates a case for rising profit margins and continuing delivery of healthy returns on capital, which will edge up to a high-teens level post 2019 on a lease-adjusted basis (post tax).

Valuation – Limited history of downgrades, consistent cash conversion (c50% of EBITDA converted into FCF in the last 7 years), property backing (owned property assets’ book value at c€470m) and a robust balance sheet make up an attractive investment case. With Jumbo at >30% 2017 PE discount to the EU retail sector and well below its peak valuation, we see the current price level as an attractive entry point. Our PT is based on a DCF using 8.9% WACC and places the stock at c16x CY2018e PE, namely still >10% discount to the current valuation of EU retailers.