Pepco Group: structurally challenged (downgraded to HOLD)

We have downgraded our rating for Pepco Group (Pepco) to HOLD, from Buy, cutting our price target (PT) to PLN 17.6/share, from PLN 31.5. The CMD did not bring any intel on a credible path of overcoming the key challenges in its core operations, going forward, in our view. At the same time, we see the company’s local competitors accelerating their store rollouts massively, and Pepco’s e-commerce strategy as vague. We also see a demographic downturn forging forward in Poland, including GUS forecasting a 17% drop in the number of children aged 0-9 in Poland over 2024-30E, the key pillar of Pepco’s super-loyal clientele. Having cut our 2025-26E EBITDA forecasts by 13-25%, we see Pepco trading at P/Es of c.17x for 2025E and c.14x for 2026E, at double-digit premiums vs. its local discretionary peers. However, at 2025-26E EV/EBITDAs of c.5x and with upside potential from a one-off cash injection from the assets disposal, we do not see the current valuation as high. Still, we need the company to clarify its strategic decisions with regards to the core business turnaround, preferably via earnings delivery, which we do not expect to happen in the near term. This may leave the share price in limbo, at lower valuation levels; hence our HOLD rating on the stock.