CCC: These boots are made for walking (upgraded to BUY)

We upgrade CCC to BUY from Hold, with a new 12M price target (PT) of PLN 351 (up from PLN 239). Our positive stance is based on: i) a rally at e-obuwie, which we expect to exceed a 30% contribution in EBITDA by 2020E; ii) the c.PLN 16/share value-accretive acquisition of its Romanian franchisee; iii) pending initiatives to improve cash conversion by more than 100 days; and iv) a reasonable valuation. We expect CCC to deliver 2017-19E CAGRs of 23% and 27% in revenues and earnings, respectively. In this light, we see the company as attractively valued at 28x 2018E P/E, in line with its Western shoe peers and its own five-year average, but at major double-digit discounts to LPP and its e-commerce peers’ median.
And that’s just what they’ll do: i) e-commerce on the rise. e-obuwie has beaten both our and the company’s expectations strongly. Indeed, while CCC guided initially for a sales growth deceleration to 50% in 2017E, it has tripled its revenues for the third year in a row. Effectively, the share of online EBITDA within CCC’s business mix neared 20% in 2017E, and we expect it to exceed 30% by 2020E.
ii) Acquisition of Romanian franchisee at 6x P/E. CCC has signed a letter of intent to acquire its Romanian franchisee, Peeraj CCC, for EUR 33m. Peeraj CCC generated sales of RON 178m in 2016 and net profit of RON 25m in the first 10 months of 2017, bringing 28% further sales expansion. The price of the deal implies a 2016 P/E of 6x, more than 80% below CCC’s stand-alone multiple, implying value creation of PLN 16/share.
iii) Major improvement in the cash conversion. Like LPP, CCC is about to launch a factoring facility for suppliers, which should allow it to improve its cash conversion. While CCC targets an improvement of more than 100 days, we conservatively assume 60 days (similarly to LPP in 2017). As a result, we expect a cash influx of c.PLN 280m in 2018E, and long-term enhancements in cash generation and the balance sheet.
iv) Sunday trading ban likely to be implemented, but hit should be muted. We expect the ban to: i) start on 1 March; ii) operate on two Sundays/month in 2018E, three in 2019E, and every week thereafter; and iii) exclude e-commerce. We assume: i) a 30% share of impulse sales; ii) the share of Sunday sales at 16%; and iii) the shift to other days growing gradually from 25% in 2018E to 100% in 2022E. Effectively, we expect the hit to CCC’s total sales to come in below 1%.
We expect a 2017-19E earnings CAGR of 27%. We expect rising e-commerce and international expansion to fuel CCC’s top-line growth pace to >20% by 2019E. On top of this, we expect its profitability to improve, driven by PLN strength and the franchisee takeover. We see CCC reporting earnings of PLN 329m in 2017E, PLN 443m in 2018E and PLN 527m in 2019E.
(Don’t let) these boots walk all over you. CCC is trading at a 2017E P/E of 28x, broadly on a par with its shoe peers’ average and its own five-year average, but as much as c.30% below LPP and c.60% below its e-commerce peers. We do not see this as justified, given CCC’s growth prospects. Risks: a slowdown in consumer spending; PLN weakness; unfavourable weather sensitivity; wage inflation; and aggressive rollout targets.