FREE

DIA: The heat is on

Post Q3’s profit warning we cut EPS for ‘17e-‘19e by an average of 8% and put ourselves 10%/19% below BBG consensus for ‘18e/’19e. Likewise our FV drops Eur0.2 to Eur3.5 and we reiterate our SELL rating on Dia. We see Mercadona’s decision to upgrade its entire store network over the next 6/7 years as a game changer for the competitive backdrop In Spain and, unlike Dia, we expect things to get worse. We note that Mercadona stores with the equivalent to a 4% market share will be upgraded every year, putting rising pressure on Dia, which has already stepped up its promotional intensity but mostly through temporary campaigns and is sticking to its ‘cheap’ store upgrades. We do not think this is enough and sooner or later Dia will have to go for a more structural approach that should include a major margin reset (lower prices/higher quality) and a step up of store capex. We believe this is not reflected in consensus expectations and see possible further profit warnings down the road. We would finally note that Dia is trading at what we see as expensive multiples (P/E ‘18e of 14.6x and EV/EBIT ‘18e of 11.5x) taking into account that Iberia still accounts for more than 70% of the valuation.