Pepco Group: Targeting the “mum on a budget” (BUY - initiation of coverage)

We initiate coverage of Pepco Group (Pepco) with a BUY rating and a price target (PT) of PLN 50.5/share. Pepco is a leading discounter, operating 3.5k stores across CEE and Western Europe. It offers a combination of apparel, general merchandise, seasonal products and FMCG to the “mum on a budget”. We expect the discount segment to continue with its broad consumer market outperformance, given the inflationary tide and economic slowdown on the one hand, and increased fiscal transfers on the other. We assume that, to neutralise the inflation impact on its customers, Pepco could take a 150bps hit on its gross margin this year, but still deliver EBITDA growth of 12% yoy in 2022E and 20% yoy in 2023E. Following a relatively slow start to 2022E, our forecasts are below the market consensus. Still, we see the stock as cheap, on our EV/EBITDAs of 11.7x for 2022E and 9.2x for 2023E, implying a double-digit discount to our Polish food retail universe. Given the similarity in growth drivers and profitability, we see such a valuation gap as unjustified. We would turn more optimistic if the zero lfl at Pepco in 1Q22 proves to be a one-off and the sales growth recovers later in the year.