EUR 1100.00 For Business Accounts Only

Insight into Polish retail - DNP (BUY, PLN 119.0); EUR (HOLD, PLN 18.73) -IPOPEMA

Insight into Polish retail
We re-initiate our coverage of Polish FMCG companies. We recommend
holding Eurocash with a FV of 18.73 PLN, which results in 7.4% downside
potential, while we recommend buying Dino with a FV of 119.0 PLN (17.8%
upside). Despite Eurocash’s recent improvement in the wholesale segment, we
dislike the current state of its retail division, which we expect to be a
significant drag on the company’s performance in the coming years. However,
we believe that all of the risks associated with the company are already
reflected in the price. We acknowledge the fact that Dino’s success story
remains unthreatened and we expect the company to continue its store roll-out
with above-market LfL sales.
Macro wrap-up: We expect macro conditions in Poland to continue to underpin
Polish consumer spending. Growing salaries together with low unemployment should
be supportive of Polish FMCG companies. The potential for further lowering of the
unemployment rate is limited as we believe that we are getting close to full
employment.
Sunday trading ban: In our view, the imposition of a Sunday trading ban has
reshuffled the structure of the Polish FMCG market. Sunday customer traffic has
been transferred from super/hypermarkets to discount and convenience/proximity
stores. However, in our view there has also been some leakage to traditional retailers
and petrol stations, which has negatively affected store chains’ LfL sales. Retailers
like Biedronka and Dino have admitted that as a result of the ban, they lost ca. 2pps
of LfL sales in 2018. There will be even more non-trading Sundays in 2019 than in
2018 but with a smaller decrease than was experienced last year. We therefore
expect the impact on LfL sales to also be smaller at ca. 1pps.
Imposition of new pension scheme (PPK): Both Dino and Eurocash will be obliged
to introduce a new pension scheme (PPK) in 2019. We assume that retailers will stick
to the lowest range of PPK participation of 1.5%. We also see wage expenses rising
depending on employees’ participation in the new schemes. We believe that a ca.
50% participation ratio is the most likely scenario, which represents costs of PLN
7.6m and PLN 10.2m for Dino and Eurocash, respectively. However, we expect these
increased costs to be offset by gross margin improvements.
Eurocash – Stable wholesale, troubled retail: Eurocash’s new operating segments
have been heading in different directions since their inception, and the improvement
in wholesale has not been enough to offset the poor performance in retail. We expect
this trend to continue due to the planned rebranding of Mila and the integration of the
retail side’s HQ.
Dino – Growth story continues: As for Dino, we believe that the company has
secured enough land to ensure that its store roll-out will continue to increase YoY.
We expect it to exceed 1,450 stores by the end of 2020E. The growing store chain
implies that stores will become increasingly mature, which should fuel LfL growth.