EUR 1100.00 For Business Accounts Only

Polish Food Retailers Seeking for effectiveness

The common focus for Polish retailers will be the announced increase in the minimum wage in Poland and companies’ ability to offset this. In that context, we have updated our valuations for Polish food retailers. We maintain our BUY recommendation for Jeronimo Martins with a FV per share of EUR 16.7 implying 13.1% upside. We think that among the Polish retailers under our coverage, Biedronka (Jeronimo Martins) is in the best position to manage opex inflation. We also believe that even if Biedronka is fined in any of the ongoing UOKiK investigations, the fine will be much lower than anticipated. We also downgrade our recommendation for Eurocash to SELL (from BUY previously) and decrease our FV from PLN 23.3 to PLN 18.4; this results in 13.4% downside potential. Due to thin margins, Eurocash looks to be the most exposed to rising employment costs, which in our view will be partially offset by savings coming from ongoing restructuring. We remain sceptical about a gross margin improvement for Dino and maintain our HOLD rating with an improvement in the FV to PLN 144.7 (6.0% upside) from PLN 127.0 previously.
Minimum wage growth: We assume companies will try to manage opex inflation by passing the costs onto the final consumers or producers, reducing expenses or improving effectiveness. We assume that majority of the costs will be borne by consumers; however according to our calculations margins in the sector should slightly decrease.
Eurocash: Due to thin margins, Eurocash seems to be the company most exposed to wage pressure. In short-term, we assume that company has a potential to improve operations effectiveness and generate savings, which will partially offset opex inflation. The integration of its retail businesses should bring cost synergies in terms of SG&A and boost gross profitability. However, over the longer horizon we do not see enough room to make up for growing wage expenses.
Jeronimo Martins: Jeronimo Martins has already started to improve its store efficiency as a means to overcome the impact of wage inflation. It has installed self-service checkouts in almost one-third of its stores, which provides upside in two ways: 1) reducing cashiers’ working hours, which should lead to savings in remuneration; and 2) creating a more efficient instore service and reducing queues, which should boost traffic and increase LfL sales. Furthermore, as a market leader, Biedronka may transfer some of its costs to producers.
Dino Polska: Dino softened its guidance for store roll-out and EBITDA margin growth at its 3Q19 results conference, which is partially due to a particularly high base in 4Q18. The company also highlighted that its aim is to continue to improve its EBITDA margin, which in light of the increased opex, will be challenging. Furthermore, we believe that headwinds coming from higher meat prices should more than offset any improvement in terms of trade, which will likely decrease Dino’s profitability. Otherwise, in terms of store roll-out and LfL sales, we believe that Dino should continue to outperform the market.