Dino Polska – Overvalued Given Cost Pressures
Dino stock has enjoyed substantial gains in 2019, driven most likely by expectations of stronger like-for-like growth in Q2 2019 alongside an accelerating inflation rate. While we recognize the potential of the Company's business model, at the current level we consider Dino overvalued given expected future risks. Dino's goal to improve the EBITDA margin by 0.1-0.2pp in 2019 represents a big challenge amid rising downward pressure on sales margins and upward pressure on costs, which can be only partly offset by positive like-for-like growth and improved supplier terms. As for the expansion pace, we do not see much room for upside surprises—we already assume that Dino will open about the same number of new stores in 2019 as its main rival, Biedronka, did during its peak openings year several years ago, and we expect 2020 openings to outpace Biedronka's record. The downside of adding new stores at such a fast rate is increasing upward pressure on labor costs stemming from Poland's current low unemployment rate. Furthermore, as it turns out, the value attributed to an average Dino store according to our calculations is higher than the value of an average store operated by its main competitor, Jeronimo Martins (JMT), even though the cash-generating capacity of a Dino store forecast in 2019-2023 is about 33% lower. With all this in mind, DNP looks overpriced to us at 20.2x 2019E and 15.8x 2020E EV/EBITDA.
Dino Polska is engaged in the business of retail sale in non-specialized stores with food, beverages and tobacco. In addition, Co. conducts processing of meats and the resulting products are dedicated, in the form of culinary meat, to external recipients within Co.'s retail chain. As of December 31, 2016, Co. operated a network of 628 Dino stores.
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