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DIA: Faster and more furious margin reset

The margin reset at Dia Spain seems to be coming faster and stronger than we initially expected. We estimate the EBITDA mg in Iberia to have dropped 330bp YoY in Q4 to 6.9% on a spiralling promotional effort to restore LfL growth and on a worsening of purchasing terms. We do expect Iberia’s LfL ex-calendar to accelerate 2.7pp QoQ to 1.2% in Q4, ahead of the 1.6pp QoQ pick up in food CPI, but we see this as insufficient considering the extent of the margin reset. Going forward, we expect no relief in terms of the competitive backdrop as Mercadona has just started rolling out its new commercial offer and is unlikely to shift its strategy. We also fail to see why suppliers should offer Dia better terms as both space and LfL growth are likely to remain muted. We thus cut Iberia’s EBITDA mg forecast for ‘18e by 140bp to 6.5% and assume there is no recovery afterwards, which implies axing 100bp from our LT mg. Our ‘18e earnings drops 29% to a level 32% below BBG consensus and on our new numbers Dia trades at a P/E 18e of 24.1x and an EV/EBIT ‘18e of 17.2x. Valuation wise, despite the 1-yr rollover to ’18, our FV drops from Eur3.5 to Eur2.65 and thus we reiterate our SB SELL.