Morningstar | Another Good Performance for Colruyt in the First Half Amid Soft Competition; Shares Overvalued. See Updated Analyst Note from 12 Dec 2018
No-moat Colruyt issued fiscal 2019 half-year results, with revenue at 3% growth versus the year-ago period, broadly in line with our expectations. While we retain our no-moat rating, we are increasing our fair value estimate to EUR 35.50 from EUR 33.50 primarily to reflect better than expected performance in France and the time value of money.Operating income surprised on the upside. The company said the group’s good performance was mainly a function of improved gross margins in the first half, helped by a supportive Belgian CPI-PPI trend, with subdued competition and cost improvements identified as the main drivers.
We maintain our bearish thesis on Colruyt, purely on valuation grounds. Our new fair value estimate reflects a fiscal 2019 price/earnings multiple of 14, which is more in line with European peers (14 times) and its own 10-year historical average (17 times). We feel that shares, which imply a generous 22 times fiscal 2019 earnings, reflect Colruyt’s past growth and profitability record, a soft competitive environment, and the structural growth of the discounter channel (of which Colruyt Belgium is a member) in the region, while it fails to account for a more mature and intense Belgian competitive landscape going forward.
While our estimates for the medium term (next 3 to 5 years) are close to consensus, the driver of our fair value estimate (and difference from consensus average price target of EUR 42 per share) is the value that comes from the long-term prospects of the firm in a sector with no sustainable competitive advantages, which ultimately should lead returns closer to the firm's cost of capital. Major risks to our valuation and thesis are a continuation of the soft competitive environment in Belgium (implying share gains), outperformance of the group's operations in France (profitability and sales density improvements) and the announcement of additional share repurchase programs.
We maintain our negative trend rating. Although we think Colruyt will continue to achieve operational improvements in the future (though incremental thanks to the company's already lean operations), we doubt that the competitive environment will remain the same. Competition is getting stronger relative to a historically more benign market environment: Ahold Delhaize recently installed a new management team in Delhaize Belgium (CEO, CFO, Supply Chain) with an intense focus on promotional activities (with promising first-quarter results announced recently); Carrefour is proceeding to a radical consolidation of the group’s European purchasing operations; Lidl has revealed plans for an aggressive expansion, calling for opening 50 more stores in Belgium (investing EUR 500 million over the next five to seven years); and there are potential threats from the entry of new foreign players in the following years (Jumbo, the Dutch soft discounter and second-largest food retailer in the Netherlands, is looking to expand in Belgium with 30 stores by 2019, according to RetailDetail).
Colruyt has announced that Frans Colruyt will step down as COO Retail of Colruyt Group, with effect from 1 February 2019, and Marc Hofman, currently CFO of the group and an executive with extensive experience in the space succeeds him as COO Retail. Stefaan Vandamme becomes the new CFO of Colruyt Group.
Etablissements FR Colruyt is engaged in wholesale, food service, distribution of fuels, production of electricity and digital printing. Co. has three operating segments: retail, which relates to stores under Co.'s own management which directly sell to retail customers and bulk consumers; wholesale and foodservice, which supplies to wholesalers, commercial customers and affiliated independent merchants; and other activities, which operates gas stations, engaged in printing and document management and provides alternative energy.
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