EUR 900.00 For Business Accounts Only

Jeronimo Martins - Still going strong - BUY - Coverage Initiation IPOPEMA

Still going strong
We initiate our coverage of Jeronimo Martins (JMT) with a Buy rating and a Fair
Value of EUR 16.61 per share, which implies 14.2% upside from the current
price. We believe Polish consumption should remain strong, underpinned by
the continued expansion of social stimulus programs, salary growth and low
unemployment. May’s readings of consumer’s sentiment reached record high,
which in our view is a good proxy for further consumption growth in the
coming quarters. This should allow to mitigate potential costs of imposition of
retail tax, which we think should be mostly transferred to the final consumers
and producers. We assume that only 15% of the costs will be borne by the
company.
Biedronka aiming for more: Biedronka should continue to benefit from strong
consumption in Poland, which is supported by fiscal stimulus programs. We assume
Biedronka will post like-for-like (LFL) sales growth of 3.8% in 2019 and 4.4% in 2020.
The macro situation is encouraging Biedronka to continue with expansion: the firm
plans to open 110 new stores in 2019 and continue to refurbish old stores to increase
the sales area and improve customer experience. In terms of profitability, Biedronka
is likely to face a major headwind from salary pressure, combined with the launch of
a new pension scheme.
Retail tax revival: In May 2019, Poland won a court clash with the European
Commission regarding the imposition of a retail tax with progressive tax rates of 0.8%
for revenues between PLN 204m-2,040m and 1.4% for revenues above PLN 2.04bn.
The act on the retail tax was implemented into Polish law on 1 October 2016, but its
collection was suspended until end-2019 due to ongoing court proceedings. A final
verdict has yet to be reached, as the European Commission still has the right to
appeal. Nevertheless, we see the potential imposition of the retail tax as a material
risk and therefore include it in our valuation. We assume the net impact on JMT of a
retail tax in Poland could amount to EUR 22m/23m in 2020/2021 respectively.
Ara to reach break-even in 2022: In our view, Ara will continue to be a burden on
JMT’s consolidated results. Due to its lack of scale, Ara is not yet able to benefit from
preferable terms of trade or, consequently, reach break-even. This is additionally
fuelled by relatively high competition on the market and price sensitive customers.
Ara is still expanding its chain of stores, which we assume should improve the firm’s
purchasing conditions and allow for an improvement in the effectiveness of logistics.
We expect Ara to open around 150 stores a year. In tandem with store roll-out, JMT
needs to open new distribution centers, with the fifth scheduled to open in 2019.
Despite this, we assume Ara will need at least three years to reach break-even.