Eurocash – Accounting Change Helps Profits
Upon a review, we found a growing gap between the size of Eurocash's reported EBITDA figures and the corresponding cash earnings. From a negligible level in 2016 and 2017, the gap (before IFRS 16) increased sharply to PLN 30m in 9M 2018, and in 9M 2019 it amounted to PLN 17m – no other retailer reports discrepancies this big. Eurocash recently changed its accounting policy, making it almost impossible to compare segmental performance in 2017 versus 2019, or make predictions for the future. The Cash EBITDA figure contracted at an annual rate of 7.7% in 9M 2018, only to rebound by 9.8% in the same period in 2019 while at the same time reported EBITDA posted respective increases of 3% and 10%. We have revised the underlying EBITDA assumptions in our valuation models to facilitate comparisons against peers. In Q3 2019, Eurocash achieved relatively slow growth in Wholesale, represented by Cash&Carry and Distribution, as well as in Retail, where revenues per store increased at a weaker pace than could have been expected given the period's high rate of food price inflation. Looking at the slow pace of store expansion this year, with only eight stores (net LTM) added in Q3, it is highly unlikely that Eurocash will reach the 900 openings target for the Delikatesy Centrum supermarket chain by 2023; realistically, that number should be set much lower at about 370. Nevertheless the Retail business is expected to improve EBITDA margins to a target 4.4% in the coming years after a restructuring exercise, and having factored this in along with EBITDA revisions we raise our target price for EUR stock to PLN 19.80 per and we upgrade the stock to reduce.
Eurocash, through its subsidiaries, is engaged in the distribution of food products, household chemicals, alcohol, and tobacco products (fast moving consumer goods). Through a range of distribution formats, Co. and its subsidiaries focus its business activities on the wholesale distribution to customers across the wholesale market segments, in particular, to stores throughout Poland such as retail stores, convenience stores at petrol stations, restaurants, hotels and cafeterias. Co. and its subsidiaries operate a range of distribution formats focused on supplying independent stores in Poland, which primarily include: Cash and Carry, Franchise Systems, and Distribution.
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