Allegro - Investors Grow Too Bearish

Orange Polska (“Orange”) has undergone a successful transformation that enables it to grow earnings (with 9M’21 eEBITDAaL up 5.3% y/y) and generate relatively high free cash flow yield (2021E/2022E FCFE Yield = 9.0%/8.1%) while maintaining low debt (1.5x EBITDA ex. IFRS 16 as of 30 Sep. ‘21). The fact that high-speed broadband represents 66% of all connections supplied by Orange (of this, close to 42% are fiber connections), combined with consistent pricing adjustments, represent another source of upside. Orange has come a long way

Allegro stock has logged a 59% loss this year, underperforming the broad market WIG benchmark, which gained 20%.

As predicted by our base-case scenario, Allegro has lowered the free delivery order value for its SMART! subscribers, giving rise to a profit warning for the coming quarters; after its own delivery costs went up, Allegro faces substantially slower growth in Q4 2021, with adjusted EBITDA expected to post a 5% y/y rise after a 29% rebound registered in 9M’21. To reflect this, we have revised our initial 2023 margin forecast to a lower 34.8% vis-a-vis 51.6% achieved in 2020. We continue to expect Allegro to keep losing market share and end up with a 3.4pp smaller market chunk in 2023 than in 2020.

After all this, on our updated 2022 EBITDA estimate of PLN 2.2bn (6% less than Bloomberg consensus), ALE stock is currently trading at 16.6x 2022E EV/EBITDA – an attractive level in our view that also represents a sizeable discount to Amazon’s 19.8x multiple. We set our new target price for Allegro at PLN 42.50, implying 22% upside potential.

Allegro remains Poland’s #1 online marketplace, providing an endless selection of products at low prices to more than 13 million active shoppers. The lack of a developed logistics infrastructure remains a major weakness, but Allegro is able to offer good customer service with what it has, offering an increasing share of next-day delivery. Further, Allegro does have wiggle room to pass some of the higher delivery costs through to its sellers, and improve future take rates, plus, it can generate further savings by growing its own parcel locker network. We also see upside in the Mall Group acquisition, which we account for at cost for now. With all this in mind, we upgrade our view on Allegro to buy.