Jerónimo Martins: Biedronka's results lost in translation
JM’s Q1 earnings rose 9% YoY and beat BBG consensus by 3%, mainly on a stronger than anticipated LfL from Biedronka. Still the shares ended the day up by just 0.2% (vs. +1.0% for SXRP) as investors seem to have chosen to bypass Q1’s strength and focus instead on the downside risks to LfL and margins in Poland as well as on Ara’s weak top-line and opex trends. We think that there are two main positives from Q1 that should not be lost in translation: i) Biedronka has achieved a LfL ex-calendar of 5.6% with 0% basket inflation on what was the toughest comp for the year and already with a 1 month impact from the Sunday trading ban; and ii) Biedronka’s EBITDA mg has been flat YoY despite a 40bp drag from the earlier than usual annual salary revision. Post Q1, we think Biedronka is well on track to reach our 6% LfL and flat margin forecasts for FY18e. Our LfL estimate implies a drop of the 2-yr cum LfL ex-calendar from 15.6% in Q1 to 14.6% over the coming quarters to allow for the impact from the Sunday trading ban. Margin wise, Q1’s 40bp headwind will be gone from Q2 giving Biedronka further ammunition to step up promotions and keep pushing for LfLs without breaching its flat EBITDA mg guidance. We also note that wage inflation for the retail industry has eased from a peak of 10% in Q4 to 7% in Q1 and was, for the first time in 2 years, in line with the country average. This may help reduce the pressure in future labour negotiations. Overall, we have left our estimates for Biedronka and JM unchanged and reiterate our BUY rating. We still see JMT’s 20% lag to the SXRP Index since Q4 results as a great opportunity to buy what is in essence the undisputed #1 grocer in Poland (90% of EV). Our Eur17.0 FV offers 18% upside potential and we also see as quite attractive the 15.9x P/E 18e ex-Ara/Hebe and the sector-leading DY.Jeronimo Martins S.G.P.S. is a holding company. Through its subsidiaries, Co. is engaged as a food distribution company with operations in Poland and Portugal. Co. operates in four segments: Portugal Retail, which comprises the business unit of JMR - Gestao de Empresas de Retalho, SGPS, S.A. (Pingo Doce supermarkets); Portugal Cash & Carry, which includes the wholesale business unit Recheio; Poland Retail, which includes the business unit with the brand Biedronka; and Others, which includes marketing services and representations, restaurants in Portugal, health and beauty retail in Poland, and its retail business in Colombia.
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