THIS REPORT WAS PREPARED BY MADALENA FELÍCIO, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 1/37
M
ASTERS IN
F
INANCE
E
QUITY
R
ESEARCH
We anticipate an 8.5% CAGR for sales and 8.9% for EBITDA for the next 8 years having changed our recommendation from hold to
BUY. We estimate a growth potential for the target price of c.15%
and an EPS increase of 17% from the 0.54 reported in 2011 to 0.63 this year. Despite this recommendation, we were conservative concerning the new operation as we wait for the company to unveil more details.
Portuguese economical conditions will continue pressuring consumption and the company margins. JM priority is to maintain price competitiveness increasing its market share in every segment. We anticipate a 10bp decrease in EBITDA margin for the year and a 13bp reduction for 2013.
Colombia: A country with 46 million inhabitants, high birth rate, fragmented retail market and a positive economic outlook (average GDP growth of 4.4% until 2016). Ingredients that lead us to believe the EUR 400mn initial investment will generate a good opportunity. Poland: Polish economy remains strong despite European economic outlook. Biedronka keeps presenting strong results (we expect 16%/19% sales growth in euro/zlotys for 2012) as it is the leading insignia in this county and according to our estimates will debit a two digit CAGR for the next eight years of 13%. It will remain the main focus of investment of JM.
Portugal: As Portuguese fight against their decreasing buying power, JM fights to keep its prices competitive by absorbing the increasing costs as these remain the key factor in the buying decision. We estimate a 2.7% CAGR of sales for the next 3 years for this sector but a general decrease in EBITDA margins.
JERÓNIMO MARTINS, SGPS
COMPANY REPORT
F
OOD
R
ETAIL
7 JANUARY 2013
S
TUDENT
:
M
ADALENA
F
ELÍCIO
mst16000401@novasbe.pt
Jerónimo gets new home...
...w
e’ll see if it can get comfortable.
Recommendation: BUY
Vs Previous Recommendation HOLD Price Target FY13: 17.50 €
Vs Previous Price Target 14.51 € Price (as of 7-Jan-13) 14.98 €
Reuters: JMT.LS, Bloomberg: JMT.PL
52-week range (€) 11.26-16.07
Market Cap (€m) 9.426.8B Outstanding Shares (m) 628.4 Source: Bloomberg
Source: Bloomberg
(Values in € millions) 2011 2012E 2013F Revenues 9,838 10.891 12.403
EBITDA 722 808 911
EBITDA margin (%) 7.33% 7.42% 7.34% Net profit 342 400 440
EPS 0.54 0.63 0.70
ROIC 21.9% 21.5% 22.7%
Capex (€mn) 449 701 568 Source: Nova ER Team
Source:
Company description
JMT is the second largest Portuguese food retail company and the third largest by Market Cap listed on PSI 20. It operates in Portugal through its main insignias: Pingo Doce (supermarket) and Recheio (leader in Cash&Carry services). It also operates in Poland with more than 2000 hard discount stores (Biedronka) which ensure 60% of its net income. The company announced the start of operations in Colombia for the 1st
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Table of Contents
Company Overview
...3
Company Description
...3
Performance Analysis
...4
Sales and EBITDA
...4
Investment
...4
Market Performance
...5
Shareholder Structure
...6
Portugal
...7
Macroeconomic Analysis
...7
Portuguese Retail Market
...8
Overall Market
...8
The Retail Market
...9
Poland
...11
Macroeconomic Analysis
...11
Polish Retail Market
...12
Colombia
...13
Macroeconomics Analysis
...13
Colombian Retail Market
...14
Operational Forecasts
...15
Portugal
...15
Pingo Doce
...15
Recheio (Cash&Carry)
...16
Madeira
...18
Industry and Services
...19
Biedronka
...20
Colombia
...22
Capex and Working Capital
...23
Valuation
...25
Cost of Equity
...26
Cost of Debt
...27
Comparables
...30
Internationalization Problems
...31
The Strategy
...31
What Went Wrong
...32
In Case Something Goes Wrong
...33
Financials
...35
Financial Statements
...36
Appendix
...36
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 1: Market Share (2011)
Source: Nova Equity Research Team
Exhibit 2: Sales (2011)
Source: Company Data
Exhibit 3: CAPEX (2011)
Source: Company Data
Company overview
Company description
Jerónimo Martins is the second largest food retail company operating in Portugal owning an increasing 18.9% market share against the 25.4% of the market leader –
Sonae with the Continent supermarkets (see Exhibit 1). The Group’s business is
directed to three distinct areas: food distribution, manufacturing and services. With its Pingo Doce (supermarkets) and Recheio (Cash&Carry) insignias operates in the retail and wholesale formats (food distribution), respectively, having a prominent position recognized in both segments. In 1997 expanded to Poland after buying the supermarkets brand Biedronka, which is now one of the strongest food retail chains in the country operating under the hard discount format. The Polish brand is leader in the segment having a clear advantage over its competitors both in number of stores (counting already with 2,000 stores) and brand recognition. In 2011 this brand alone represented almost 60% (EUR 5.8 bn – see Exhibit 2) of the total sales of the company as well as 70% (EUR 312 mn – see Exhibit 3) of the total investment. In the food industry sector, JMT has a significant presence in Portugal being leader in various markets for fast moving consumer goods, through its holding shares in Unilever Jerónimo Martins and Gallo Worldwide whose brands are leader in oil,
margarine, ice creams and detergents markets. The Group’s portfolio also includes a
business area related to marketing services, representations and restoration that includes Jerónimo Martins Distribuição de Produtos de Consumo Lda (Distribution of Consumer Products - representing international brands in food and cosmetic
segment), specialized retail chain Hussel (trade and manufacture of chocolates), Caterplus (trade and distribution of food products) and Jerónimo Martins Restauração e Serviços (Restorations Services– Jeronymo Café, Chili’s restaurant
and ice cream brands: Ben&Jerry and Olá)
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Exhibit 4: Sales Breakdown
Source: Company Data
Exhibit 5: EBITDA Breakdown
Source: Company Data
Exhibit 6: Capex Breakdown (2005-11)
Source: Company Data.
a) Acquisition of Portuguese and Polish Plus stores
Performance analysis
Sales and EBITDA
During the first years of 2000 Jerónimo lived a domestic crisis as its business reached EUR 250 mn of negative results. After an internal restructuring it was able to turn around and is currently one of the most successful Portuguese companies with a solid growth structure. From 2008 until 2011 the sales grew at a CAGR of 12.6% amounting to EUR 9,839mn, while EBITDA also registered a double digit CAGR of 14.9% to EUR 722mn. The Group justified these results with its execution ability, particularly in Poland, where it proceeded with an ambitious expansion plan having opened almost 900 stores from 2008 until last year. The Portuguese business is now heads with a tough macroeconomic environment. However it has debited sales CAGR of 7% for the past four years.
This country, as mentioned before, is the growth driver of the company and its importance in the results has been increasing rapidly. In 2005 Biedronka contributed with 35% of sales, percentage that, in 2012 is expected to exceed 60% of the total, hitting EUR 6.5bn (see Exhibit 4), translating it into a CAGR1 of c.8%. On the other hand, the Polish EBITDA, was c.23% (in 2005) having seen its contribution more than tripling, hitting almost 70% in 2012, a total of EUR 0.46bn, growing at a CAGR2 of almost 17% (see Exhibit 5). While this business
increases in significance, the Portuguese business, in contrast, has been losing its share. In 2005 the Retail Mainland sales represented c.40% of the total sales (EUR 2,2bn) while its EBITDA slice was almost 50% reaching EUR 148mn (Recheio, Madeira, Industry and Services represented 25% of sales and 30% of EBITDA). Though, the maturity state of the market would eventually limit this growth and in 2012 we do not expect the sales from the Portuguese operations to reach 30% of the total and the EBITDA we estimated to be c.32% (Recheio, Madeira, Industry and Services c.13% of sales and 10% of EBITDA).
Investment
The belief in Biedronka’s potential can be also seen in the total investment the brand obtains (see Exhibit 6). Since 2005 it is observable the increasing amount of investment Jerónimo Martins provides this insignia alone. Until 2007 the main focus of investment was still the Portuguese Retail Mainland which was at that time receiving c.50% (EUR 240mn) of the total while all other business shared the remaining amount. However, this tendency has changed and the polish brand
1
From 2005 to 2012
2
From 2005 to 2012
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Exhibit 8: JM Share Price Evolution (2001-12)
Source: Bloomberg
The company bets in differentiation...
JM stock price increased c.700% in 10 years...
has been watching its amount of investment increase (from 2005-2012) at a CAGR of 33%, having received in 2012 EUR c.520mn, c.70% of the total while Pingo Doce only accounted for 24% (EUR c.100mn). As a result, the company has been investing in store opening and renewing as a way of increasing proximity with customers while making stores more appealing and easier to circulate. Since 2007, after acquiring the Portuguese and Polish stores from Plus chain, JM has been absorbing its Feira Nova insignia converting it into Pingo Doce stores. This way the Group is being able to increase its market share and decrease advertising costs being focused in one insignia alone. In this brand reposition it has bet in some factors to be set apart from the competition: i) high bet in advertising the quality of its products, its own brand, ii) increased number
of SKU’s in fresh products from national producers (that represent c.40% of purchases) but limited offer of other products (Pingo Doce offers 5,500 SKU’s
and Biedronka 900)3 iii) maintained its EDLP4 policy, as already happened in Biedronka.
Market Performance
After receiving in 2011 the prize for best performance between the companies integrated in PSI-20 with an appreciation of 12.2% during the year (in 2010 also
had the best performance with an appreciation of 63.2%), JM still presents consistent growth signs having grown c.14% during 2012 (see Exhibit 7). This year did not present the best performance as BPI, Mota Engil and Sonae SGPS presented a one year growth of 102%, 57% and 52%, outperforming by far the Portuguese index that revealed a 3% growth. In April the company reached the maximum value of the year (EUR 16.07) as it announced the approval of a dividend distribution of 0.275 per share. Since 2001 JM stock has grown at a CAGR of 20% having appreciated 690% for the past 11 years (see Exhibit 8).
3
Source: Company Data. Around 2003 JM offered around 12,000 SKU’s in Pingo Doce
4
Every Day Low Prices – pricing strategy that promises customers the lowest prices everyday without them having to resort to coupons or promotions. It is believed it creates customer loyalty.
Exhibit 7: JMT (in blue) and PSI-20 (in pink) Performance in 2012
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Exhibit 9: Shareholder Structure
Source: Company Data
Shareholder Structure
Jerónimo Martins has four main shareholders in its structure: i) Sociedade Francisco Manuel dos Santos that currently owns 56.1% of the total being the one with the highest percentage of voting rights, ii) Heerema Holding Company Inc. is a Dutch-based multinational that operates in building industrial platforms for oil and gas transportation, that acquired 10% of the shares through
Asteck,S.A. in 2007, iii) Carmignac Gestion is a French asset management company that acquired directly 2.74%, iv) in February 2007 BNP Paribas – the third largest bank in the world - acquired 2.03% of JM shares through its investment fund, v) the remaining 29% of the company’s capital arefloating and company own shares (see Exhibit 9).
Concerning the business structure, the company holds several partnerships in its different segments. The retail mainland unit (Pingo Doce stores in the Continent) is shared with the Dutch retailer Ahold that owns 49%. The Portuguese retailer owns 75.5% of the units in Madeira, which include 13 Pingo Doce and 1 Recheio store, but hols 100% of the Cash&Carry and Biedronka businesses. In the manufacturing segment JM holds Joint Venture with both Gallo Worldwide and Unilever holding 45% of each. In the service division the company holds 100% of Jerónimo Martins Distribution of Consumer Products (JMDPC), while it shares Hussel, which resulted from a Joint Venture, with the German Douglas A.C. controlling 51% of it. This year the Group increased its share in Caterplus buying the remaining 51% to Sugadigal (see Exhibit 10).
Exhibit 10: Jerónimo Martins Ownership Structure
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Exhibit 11: GDP growth 2006-17
Source: IMF Economic Outlook
Exhibit 12: Public Debt 2006-12
Exhibit 13: Yields on 10y bonds
Source: Bloomberg
Source: IMF Economic Outlook
Exhibit 14:Unemployment 2006-17
Source: IMF Economic Outlook
Portugal
Macroeconomic analysis
Portugal has been following EU up and down tendencies concerning GDP growth however showing a much lower growth than the average of its countries (see Exhibit 11). During the year of 2009, Portugal followed EU in its recession period as a consequence of the global sovereign debt crisis that was aggravated by internal management measures that led the country to its weak competitive capacity. Since 2007 that its public debt has been suffering major increases due to the excessive spending of money in public works (see Exhibit 12). In only 5 years it has gone from 63.7% to 119.1% (expected this year) of the country’s GDP. Furthermore, the Latin country suffered from increasing pressure in financial markets as it watched main rating agencies downgrading its sovereign debt ratings to speculative grade5. Hence, as investors perceived Portugal as a riskier country its ability to finance through the markets decreased, increasing its difficulties to comply with its external (e.g. debt and interest payments) and internal obligations (e.g. salaries and pensions).
On April 7th of 2011, after Greece and Ireland, Portugal asked European
Commission for a bailout subsequent to the Government being forced to pay unsustainable interest rates on the market to issue debt6 (see Exhibit 13). Thus, with the purpose of receiving financial aid, the country is now committed with the European Union to achieve its convergence criteria by correcting the balance of payments and consequently restoring its capacity of issuing debt in the market at reasonable rates. As a result it has announced a set of measures that started to be implemented in 2012, will be aggravated in 2013 and some will be extended further until balance is restored. With the purpose of reducing the deficit to 5% (in 2012) the Government has imposed a set of heavy measures that were not well accepted by the Portuguese population. On the expenditure side: i) cut on workers’ wages and
pensions, ii) cut on expenses of the health sector, iii) cut on number of public employees; on the revenue side: i) change on VAT structure increasing the number of goods and services being charged at the highest rate, ii) increase on direct taxes, iii) reduction of deductions and exemptions, iv) revaluation of all real estate. As a consequence, unemployment rate exceeded 15% this year (see Exhibit 14) and is expected to reach 16% in 2013. At the same time the average disposable income has declined causing a drop in private consumption as well as worsening labour market situation. The country is now committed in enhancing its growth capacity so
5
Currently, the main rating agencies – S&P (BB), Moody’s (Ba3) and Fitch (BB+) – see Portugal as a speculative economy and have a negative outlook on its future
6
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Exhibit 16: Private
Consumption Expenditure 2005-13
Source: OECD Economic Outlook
Exhibit 15: Portuguese Problems in Paying Monthly Bills 2009-12
Source: Fundação Francisco Manuel dos Santos
0,0% 10,0% 20,0% 30,0% 40,0%
Food&NAB Transports Housing HoReCa Clothes Others 1990 2000 2005 2011
Exhibit 17: Net Family Disposable Income 1990; 2007-12 (‘000 €)
Source: PorData
i) Net – total income deducted from taxes and loans
that it can become more competitive while reducing its excess public debt. Thus it
can restore investors’ confidence plus its investment grade level.
Portuguese Retail Market
Overall market
When compared to the Euro zone big economies like Germany, Spain, France or Italy, Portugal is a small retail market. Its 10.5 million inhabitants have seen its average disposable income decrease due to the contraction of the economy. With the help of Exhibit 15 we can understand the economic difficulties through which the Portuguese are going through. Since 2009 the Portuguese average capability of paying bills has deteriorated with 2011 being the worst year for families. However, we expect a worsening difficulty as a consequence of the aggravation of the austerity measures for 2013. In line with this analysis is the evolution of private consumption expenses that we can see in Exhibit 16, for Portugal and the Euro zone countries. From 2010 to 2011 there was a drop in Portuguese family expenses of 3.9% that was aggravated this year falling 6.8%. The average consumption expenses for the Euro area for the same period remained more stable but also suffered a decrease of 0.5%. While it is expected a recovery for the European countries for the next year, Portugal will continue to observe a contraction in familiar private expenses as severe budget measures have been approved by the Government for the next three years.
It is important to bear in mind that food expenditures are one of the most important in the family budget and one of the lasts to be cut on. In Exhibit 17 we observe the evolution of the average familiar disposable income, an analysis we believe being significant in order to understand the weight of each expense in the Portuguese private consumption exposed in Exhibit 18.
Exhibit 18: Portuguese Consumption Structure 1990-2011
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Exhibit 19: Retail
Consumption Breakdown 2007; 2011 and 2012E
Source: Bank of Portugal
Source: APED
Non food goods suffer with reduction of income...
JM keeps gaining market share...
The average annual household income in 1990 was EUR c.16,500 and c.90% was used to cover family expenses. Hence, 29.5% was spent on food & Non alcoholic beverages (EUR 4,380), 14.8% on transports (EUR 2,198), 12.4% on housing (EUR 1,841) and c.10% on HoReCa7 (EUR 1,470). In 2011 families received an average of EUR 31,318 but annual expenses assumed a different structure. Housing, now assumed the biggest expense representing 29.2% (EUR 8,230) of the total, transports maintained its weight but increased in absolute value to EUR 4,087 (14.5%). On the other hand food & Non alcoholic beverages decreased to 13.3% (EUR 3,749) and the HoReCa expenses maintained its weight, amounting to EUR 2,902 (10.3%).
Exhibit 19 allows us to comprehend that with the aggravation of economical conditions people tend to channel their income to basic need goods. Thus, non food goods such as clothes, pharmaceuticals, books, fuels, etc. tend to suffer with the budget cut. These goods are expected to present a 4.2% fall comparatively to 2011 that already presented a drop of 2.9% from the previous year, while food goods present a 0.1% fall in 2011 but is estimated a 2.2% increase for this year.
The retail market
We have been witnessing a structural change in the food distribution formats in Portugal. Traditional spaces have been losing weight for larger centres that are capable of offering a greater variety of products at lower prices and extended hours. Hence, the main format operating are supermarkets and increasingly specialty and discount stores.
The Portuguese retail market is now dominated by two national big players that, through acquisitions have been reinforcing their positions: Sonae with Continent department stores acquired Carrefour in 2007 for EUR 662mn, and Jerónimo Martins with Pingo Doce supermarkets purchased Portuguese and Polish Plus stores in 2007/08 to the Tengelmann group for EUR 320mn. The top 6 retailers
7
HoReCa – Hotels, Restaurants and Cafes
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 10/37 Source: Fundação Francisco Manuel dos Santos
Private brands increase 60% in purchases...
JM decreases offer of # of items per category...
represent 76% of the total market, and in turn the 2 biggest players account for 44.3% of that total in a time where the market is suffering stagnation in sales. In
Exhibit 20 we can observe that small retailers are losing its weight as the 2 biggest gain market share. In 2007 “Other” chains represented 34% of the
market, a value that decrease 100bp until 2011. On the other hand Intermarché and Auchan insignia watched its market share decrease 15bp and 30 bp for the past five years while Sonae and Jerónimo Martins gained 70bp and 40bp for the same period. This is a consequence of the comparative advantage that great food distribution chains obtain from the exploitation of economies of scale that come with the application of new technologies in inventory management as well as the increasing understanding of the spending habits of consumers. Its greater capacity of performing marketing actions and promotional campaigns than smaller retailers increases its bargaining power with suppliers and this is reflected in the prices available to consumers. It is expected that both leaders keep increasing their market share at the expense of smaller retailers that face a higher difficulty in keeping up.
Retailers bargaining power is even higher when these compete directly with the suppliers products through their own private labels. This battle is uneven since suppliers have no control over the decisions of exposure and promotion of its products in commercial spaces under conditions identical to the ones of the branded distribution. It is important to mention that Jerónimo Martins has its own brand – Pingo Doce – and has been watching its share increase for the past few years. In 2008 41.7% of its sales were from its private label, value that increased to c.50% in 2011 (see Exhibit 21). This is explained by the change in consumer’s
perception in relation to this type of products which people used to associate to inferior quality. Although not being something new in the market Jerónimo Martins has been making a strong bet on its own brand reinforcing its EDLP policy. Internally it has been limiting the number of brands. Around 2000 the Group offered 7 to 8 products per category. Currently offers 1 to 3 brands with one of those being its private label and the other being the market leader brand. The purpose is to increase visibility and brand loyalty.
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Exhibit 24: Unemployment Rate 2006-17
Exhibit 22: GDP Growth 2008-17
Source: IMF Economic Outlook
Exhibit 25: Private
Consumption Expenditure 2005-13
Source: OECD Economic Outlook
Exhibit 23: Public Debt 2006-12
Source: IMF Economic Outlook
Source: IMF Economic Outlook
Poland
Macroeconomic analysis
Poland has been the only European Union member that has not presented negative GDP growth since the financial crisis hit Europe (see Exhibit 22) despite presenting levels of economic slowdown this year. The Polish economy has not suffered rating upgrades since the European crisis burst, hence S&P (A), Moody’s (A2) and Fitch
(A) currently categorize it as an investment grade financial system with a stable outlook for the future. The positive economic growth can be explained by the high levels of domestic demand, its main growth driver, and due to the fact that Poland’s
GDP depends shortly on exports, so it is not being affected by the general decrease of external demand.
It is also important to highlight that its public debt has always been in line with the 55% legal limit criteria (see Exhibit 23). The setback is that Poland is not a member of the Euro zone and has its own currency – the Zloty – which causes it to contract a big part of its debt in foreign currency such as Euro and Dollars. Hence, it is subject to currency risk that may result in a huge and sudden increase of its value (please see Apendix I in page 36). After suffering a large devaluation in the 3rd quarter of
2011, the Polish public debt reached its highest values, according to the IMF, of 56.3% of its GDP. However the Government was able to change the debt accounting
criteria’s (whenever debt reaches values between 50% and 55% of GDP) by
including the cash available in hand as well as the exchange rate which would be the average of the year instead of the one of the last trading day of the year, making its value decrease to 53.3% of GDP.
This is a country with more than 38 million inhabitants which is facing the highest unemployment rate since 2006 of c.10% (see Exhibit 24), a value that is expected to remain stable and start decreasing after 2016 according to IMF predictions. On the other hand consumption has suffered a decrease since 2008 with private expenses falling 2.1% not following the sharp fall of the countries within the euro area (see
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Exhibit 26: Retail Formats in Poland and Germany 2011
Source: Retail Poland and Tesco Report
Exhibit 27: Polish Hard Discount Format Market Share 2011
Source: PMR
Source: Retail Poland and Company Data
JM keeps gaining gorund in Poland...
Polish Retail Market
The Polish market is still a fragmented one in which we observe significant competition between both foreign and local retailers that ultimately are helping this industry to grow. The Western country is among the least formalized markets in Europe, still having about 40% of informal retailers (being just ahead of Turkey –
55% - and Russia – 80%8), a tendency we believe will decrease during the next few years as main retailers gain market share in different formats and put pressure on smaller sized stores. Regarding the formal retail in both Poland and Germany the hard discount is the dominant format accounting for 28% and 40% of the formal market respectively (see Exhibit 26). It is in this segment that JM acts with
Biedronka’s insignia which is a clear leader with 70% of total sales (see Exhibit 27), having only other two main competitors in this format (Netto and Lidl). The three together represent 98% of sales in hard discount chains. Supermarkets also have a significant weight in both countries accounting for 28% and 22% correspondingly.
In Exhibit 28 we have the market share breakdown for 2008 to compare with the 1st half of this year. Jerónimo Martins has been the company that accounted for the highest increase in the market, having gained c.3% during the past four years. The Schwarz Group with the sum of Lidl and Kaufland insignia shares accounts for 7.2% of the market, but with one insignia alone Tesco is the second leader with a share of 6.9%.
In what regards food expenses, Poland is one of the least spending populations, consuming less than half than the average of the European Union. Poles spend EUR c.1,250 in food and non alcoholic beverages per year (per capita) while Europeans in average spend EUR c.1,9709. It is also important to highlight that private labels (supermarket brand) are gaining adherents in this type of shopping. In 2011 c.14%10 of the products bought in hypermarkets were private labelled ones (Biedronka sold
8
Source: Retail Poland
9
Source: Euromonitor information and Nova Team estimations
10
PMR Publications –“Importance of private label products in Poland”
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Exhibit 29: GDP growth 2008-17
Source: IMF Economic Outlook
Exhibit 31:Unemployment Rate 2008-17
Source: IMF Economic Outlook
Exhibit 30: Public Debt 2006-12
Source: IMF Economic Outlook
c.55% of private label), a value that has registered an increase due to macroeconomic reasons. Consumers are getting more and more sensitive to changes in price while fewer associate these brands with lower quality. Hence, it is expected this value will reach 25% in five years11. To be able to reach these prices associated with cost reductions and margins improvement, companies are cutting off in dispensable intermediaries (decreasing ex-factory prices).
Colombia
Macroeconomic analysis
And as the majority of the analysts suspected, the retailer announced Colombia as the new investment opportunity and market where it will open its first stores until March of 2013.
The Republic of Colombia is a democratic state of Law with great opening to private investment, then again has a significant population with c. 46 million inhabitants, being the 27th most populated country in the world and the 2nd one in Latin America, after Brazil. Its population has an average age of 30 years old and a high birth rate thus providing a big market with large growth capacity on the long run. Furthermore, this country has a stable economy, having received in 2011 an investment grade rating by the three main rating agencies (stable Baa3
by Moody’s; positive BBB+ by S&P; stable BBB by Fitch) while the IMF predicts a
GDP constant growth of 4.5% until 2017 (see Exhibit 29). It is also a country that, for the past decade has maintained a stable level of public debt around 30% of its total GDP (see Exhibit 30).
Colombia is a large producer of oil, being dependent and sensible to drops in the price of this commodity. This year it reached a personal record of producing circa one million barrels per day12 (a value that only represents 1% of the world’s
production but c.6% of the Colombian GDP). On the other hand it is a country with elevated levels of corruption and criminality13, though decreasing, that are aggravated by the high levels of unemployment (see Exhibit 31) and inequality (0.585 in GINI index) where currently, more than 27% of the population lives on less than $2 a day.
11
Source: Poland Retail Market
12
Source: U.S. Energy Information and Administration. Saudi Arabia is the world leader producing c.11 million barrels per day
13
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Exhibit 32: Dominant Formats in South America 2011
Source: A.C. Nielsen
Exhibit 33: Leaders Within the 13% Total
Source: Nova Research and Exito Investors Presentation
Colombians prefer proximity...
Colombian Retail Market
The Colombian market retail is a very fragmented one, dominated by small independent retailers. In 2011 there were 2,373 companies specialized in retail sales registered in Superintendencia de Sociedades (Companies regulator) having only 6 of which sales over COP 1 trillion (more or less EUR 420mn). As regards the dominant formats in this country, traditional stores make up to 50% of the market while hypermarkets constitute c.30% of the total (see Exhibit 32). In South America, Mexico is the only country that is, as well, dominated by local shops, however in contrast Brazil is the most formalized retail market of Latin America where informal retail only accounts for only 15% of the market.
Inside the modern format the main leader in this country, with only 7% of market share, is the Casino group with its Exito subsidiary that operates in almost all layouts: supermarkets (Cafam, Carulla), hypermarkets (Exito), convenience and discount stores (Bodega Surtimax). Together with the top 5 retailers their total market share is less than 13%. However, within this percentage Exito accounts for 42% of the total, followed by Carrefour14 and Olimpica, the other two main retailers (see Exhibit 33). This fragmented market offers good entering opportunities to the Portuguese retailer also since the discount format only
accounts for c.3% of the total formats (“Bodega Surtimax” –Casino’s banner – is the only hard discount player in this market).
The Colombians attend to the supermarket with frequency in order to do their weekly shopping preferring the ones within walking distances from their places. This happens especially in big cities where intense traffic makes customers visit far larger retail formats more sporadically. Moreover, with the global crisis, small outlets started gaining market share as they strengthened their relationships with customers making the larger format companies betting on this type of approach and opening more local convenient layouts. Despite not having a lot of information about the strategy and the format that JMT will pursuit, with the experience it has in the EDLP strategy, both in Poland and Portugal, we believe it will try to replicate this format as well as the proximity to local housing approach. Jerónimo Martins goal is to be in the top three by 2015, suggesting revenues of
c.EUR 1bn (Olimpica is the third biggest seller and in 2011 sold ≈ EUR 1,2bn). For now, the company is planning to invest around EUR 400mn until 2014 in opening and equipping the first stores.
14
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PAGE 15/37 Source: Company Data and Nova Research Team
Source: Company Data and Nova Research Team
Exhibit 34: Sales per sqm evolution 2010-20F Margins will suffer with economical situtation...
Operational Forecasts
Despite the negative economic environment in Portugal, the Group has been registering positive growth in revenue in all segments proving the sustainability of the company. The gross margin reduction by 60bp from 2011 to 2012 (22.8% to 22.2%) reflects both the weight of Biedronka15 in the total business, since this segment was the one that registered a decrease in this margin, as well as the strong publicity on Pingo Doce. We anticipate an EBITDA of EUR 808 million for the cumulative year with a respective margin of 7.4%. However, in 2013 we believe it will suffer a sales and margin decrease due to i) economic conditions in Portugal that will slowdown consumption, ii) aggressive promotional campaigns in both countries, iii) increase in price of some raw materials and iv) absorbency by the company of determined costs not to affect prices. In this sector we estimate number of stores, sales per sqm, total area (sqm), as well as EBITDA margin and depreciations for every business until 2020 (for Colombia we estimated until 2025). Our assessment is based on data the company provided for the four previous years. We have assumed the area per store did not suffer major changes16, and we have as well incorporated in our model the fact that a store is not fully operational during the first year of its opening17.
Portugal
Pingo Doce
From 2008 until 2011 Pingo Doce sales grew at a CAGR of 8% due to the continuous investment the company does in increasing the sales area. In 2008 the total sales area was of c.433,000m2, with a sales per square meter of EUR 5.5. With 13 more opened stores until 2011 Pingo Doce increased to 440,300 its total sales area, at the same time as the sales per sq meter increased to EUR 6.9 (see Exhibit 34).
15
Please refer to Exhibit 2 and 4
16
Average number of sqm per business store: Pingo Doce – 1,268 sqm; Recheio – 3,150 sqm; Madeira – 950 sqm; Biedronka – 600 sqm; Colombia – 850 sqm
17I tis also important to mention that in the “%growth” caption that appears in every
table, in the year 2020 (2025 for Colombian) is related to the last year presented, meaning the growth between 2020/2015.
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 16/37 Source: Company Data and Nova Research Team
Portuguese market hinders organic growth...
We expect sales to
slowdown and promotions to keep strong....
However, we were a bit pessimistic in terms of store opening for the next 8 years as the Portuguese retail market is reaching its maturity and consumption is under pressure. Hence, contradicting the company’s expectations for the next two years
of opening 10 Pingo Doce stores we believe JM will open 8 new stores until 2014 and only 3 more until 2020, increasing the total square meters to 456,800 by that time (at a CAGR of only 0.39%), simultaneously the sales per square meter will increase to EUR 8.1, just above inflation (see Exhibit 35).
On the other hand the insignia sales will suffer a small slowdown as the consumers adjust to the reduction of their disposable income as a consequence of the austerity measures the country implemented that will be aggravated next year (CAGR will decrease from the 2008-11 8% to 1.94% in 2012-20) (see
Exhibit 36). However, the company is as well adjusting to this macroeconomic environment and we believe this will have a positive impact in its private label that currently represent more than 41%18 of its sales. These type of products offer an inferior price relative to brand goods, another reason for which we believe the sales value will decrease. At the same time it offers ready to eat meals and promotions as well as its proximity strategy with the client. Concerning the EBITDA margin, we expect it to reflect the strong investment in promotional campaigns the Group makes to reinforce its price positioning (e.g. 1st of May
campaign where all purchases over €100 had 50% discount) which justifies the 40bp decrease. The company is trying to gain market share against its main competitor Sonae knowing that it has the advantage of having a greater leeway
since the main source of results comes from Biedronka, while Sonae’s profit
depends mainly on its Portuguese performance. Hence, it is able to proceed to more aggressive promotions and advertising campaigns as Pingo Doce represents 30% of its total EBITDA. Thus, we believe its margin will fall this year, will be stable in 2013 and will begin to recover after 2014.
18
Source: Fundação Francisco Manuel dos Santos
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 37: Sonae MC Main Indicators (2008-11)
Source: Company Data and Nova Research Team
Exhibit 38: Recheio Operational Forecasts (2008-20)
Source: Company Data and Nova Research Team
Perhaps Sonae should start being worried...
Through Exhibit 37 we can compare JM main indicators with the ones from its major Portuguese competitor. From 2008 to 2011 Jerónimo sales per square meter increased at a CAGR of 8.12% (from EUR 5.5 to EUR 6.9), while Sonae did not present significant growth, maintaining a EUR 6,000 sales value per square meter. This can be justified by the fact that the sales value did not accompany the sales area growth. During these four years Pingo Doce revenues grew at an 8% CAGR with the sales area increasing by less than 1%. On the other hand, the leading retailer saw these values increase by c.4% and 3.6%, respectively. Modelo and Continente opened 142 stores during these four years and Pingo Doce only 13. Concerning EBITDA, JM lower margins is explained by
the company’s priority in maintaining price competitiveness investing in promotional activities and absorbing some of the products increasing costs (e.g. VAT). Also, as explained before, Sonae is highly dependent on its Portuguese margins, benefiting Jerónimo’s capacity to decrease margins making its prices more appealing.
Recheio (Cash&Carry)
With 36 cash & carry and 3 food & service platforms in Portugal (one of each in Madeira), Recheio is the operator that covers the highest area of national territory.
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 39: Recheio Operational Forecasts (2008-20)
Source: Company Data and Nova Research team
Recheio is suffering with attack to HoReCa...
Madeira will remain stable...
slowdown until 2020 and grow at a CAGR of 1.2% reflecting the signs of maturity of the market. Hence, we estimate JM will open 4 more Recheio stores until 2020 and will reach a EUR 7 sales per sqm meter by then.
In Exhibit 39 we can observe the evolution of sales and EBITDA in this insignia. We inferred a CAGR of 3% (from 2012 to 2020) that will not be accompanied by the increasing sales per square meter, as we predict this item to grow at a CAGR of 2% for the next eight years. We have to take into consideration the fact that the traditional retail (Cash & Carry customers) is losing its market share for modern retail, not being able to be competitive relatively to bigger surfaces that put a lot of pressure in smaller retailers due to its bargaining power with suppliers and current concern with proximity with the costumer. On the other hand, the HoReCa chain is suffering in Portugal as a result of a severe fall of activity in this sector as well as a VAT increase from 13% to 23% leading to a large number of closing establishments19. As a consequence of increasing difficulties JM reports in its 3Q2012 results an increase in store traffic but an average ticket decrease. On the other hand the EBITDA margin will also suffer as JM tries to absorb the maximum margin of VAT increase and bets in promotional activities. We believe this margin will decrease 40bp to 2013 but will slowly recover, reaching a 6.2% margin in 2020. The amount of depreciation is in line with the store opening and space reshuffle.
Madeira
JM operates in Madeira with 13 Pingo Doce and one Recheio store as well as one food and service platform. For Madeira we do not anticipate any store opening for the next eight years. In our estimations, sales will grow in line with inflation at a CAGR of 1.5% until 2020. The sales per square meter will accompany this tendency and by 2020 we expect them to reach EUR 12.7. Similar to what is happening in the Continent, 2012 and 2013 will be adjustment years as the country tries to achieve the deficit goal of 5% this year, thus, as income taxes and VAT increased in the island we expect this to be reflected in
19
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 40: Madeira Operational Forecasts (2008-20)
Source: Company Data and Nova Research Team
Exhibit 41: Industry Operational Forecasts (2008-20)
Source: Company data and Nova Research Team
Exportations help Industry grow...
the company’s margin as JM absorbs this increase to maintain its price
competitiveness. The level of depreciations represents maintenance needs for the normal function of the stores (see Exhibit 40).
Industry and Services
The industry segment includes Gallo Worldwide Company and the Joint Venture with Unilever. This year the Group has reported a 2.4% sales growth in this segment after three years registering revenue decrease, which is mainly explained by the strong increase in olive oil exports. We estimate the industry sales to grow at a CAGR of 2.2% for the next 8 year (see Exhibit 41).
This insignia includes Out-of-Home and In-Home products, and we believe its
margin is expected to reflect consumption’s recessive impact during the next 2
years especially in the Out-of-Home market since consumers are more worried in
cutting back in what they can. For this reason, the Group will continue its aggressive promotional activity initiated in 2011, as is doing in other segments.
On the other hand, 2012 end year’s margin is also expected to reflect an
increase in the prices of electricity and gas20 that will be absorbed by the
company. We believe in 2013 there will be a higher contraction c.20bp as austerity measures will be even harder to support. It is important to highlight the investment JM has been making in order to extend Gallo brand to other geographies. Its major imports come from Brazil and Venezuela and the most recent market entrance has been to Russia and China. We expect the expansion
20
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 20/37 Source: Company Data and Nova Research Team
Source: Company Data and Nova Research Team
Exhibit 42: Services Operational Forecasts (2008-20)
Exhibit 43: Industry & Services Operational Forecasts (2008-20)
Source: Company Data and Nova Research Team
to these emerging markets to be reflected in the sales of this insignia providing a more stable growth between 1.5% and 2% until 2020.
The services segment closed 2011 with eighty six own stores and five franchised, twenty six more stores than in 2010. Like the other Portuguese insignias, services sales have registered a decrease this year due to economic factors regarding loss of purchasing power by families. We believe sales will remain low as people are cutting back in out-of-home expenses and for the next three to four years will not regain its previous growth of 6% (from 2008 to 2009). EBITDA margin is expected to remain relatively stable (see Exhibit 42).
Concerning depreciations our estimations include mainly store opening in the services insignia as well as store maintenance (see Exhibit 43).
Biedronka
This segment continues showing strong signs of growth while it absorbs the largest share of investment. After reaching store number 2,000 (closing the year with 241 more stores than 2011) we believe the next 1,000 stores will be opened until 2015 where it will reach its next goal of having 3,000 operational stores, c.1,797 thousand square meters (see Exhibit 44).
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 46: Biedronka Operational Forecasts (2008-20)
Source: Company Data and Nova Research Team
Exhibit 45: Tesco (in Poland) Main Indicatores (2008-12E)
Source: Company Data and Nova Research Team
JM shows better indicatores than its closest competitor...
Layout conversion in every Biedronka store is finished...
In Exhibit 45 we can observe the same indicators for Biedronka’s main competitor - Tesco. The Portuguese retailer is clearly ahead in number of stores and in terms of sales per sq meter Biedronka leaves no doubt about its leadership. In 2012 we estimate Biedronka to be selling PLN 21,800 per sq meter while Tesco expects a decrease in this indicator to PLN 12,600. For the next 8 years we estimate the number of square meters in Poland will increase at a CAGR of 5.8% almost reaching 2,000 thousand sqm in 2020. After closing this year with a cumulative sales growth of 16% (19% if we account in zlotys) we estimate this caption to continue having a sustainable double digit growth at a CAGR of 9.1% in EUR leading us to believe Biedronka will reinforce its strength in the country (Biedronka is market leader in price) and will be selling EUR 5,800 per square meter in 2015 and EUR 6,600 in 2020 (13.28% more than in 2015).
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Exhibit 47: Relation between EUR/PLN and Biedronka Sales
Source: Bloomberg and Company Data
Exhibit 49: Colombia Operational Forecasts (2012-25)
Source: Company Data and Nova Research Team
Exhibit 48: Colombia’s Two Main Retailers Indicatores (mn PLN) 2011
Source: Company Data and Nova Research Team
highlight that, as Biedronka operates in a different currency - the zloty - it is subject to currency risk. In Exhibit 47 we observe the impact that zloty
devaluation has in Biedronka’s sales. This happens because Jerónimo Martins converts all sales into the domestic currency – euros – for reporting reasons and part of the value is lost in this trade. The other reason is that the company negotiates some polish rents in euros (between 15% and 30% of total polish rents), meaning that with zloty devaluation its value will increase pressuring
negatively the company’s margins.
Colombia
It will be during the 1Q of 2013 that JM will open its first stores in this country and due to its relevance and proximity we decided to already include this business in our valuation. In this case, we have increased the number of forecasted years to 2025 because we believe that eight years of estimations (with the first 4 to 5 debiting negative results) would not provide a true long term value for Colombian operations. Thus, in order to obtain a proxy for the main indicators we will use as comparable the two leading retailers in this country – Exito and Olimpica21.
After analysing their annual reports we have concluded that Exito through its supermarket chain sells COP 12.67 thousand per square meter (≈ EUR 5.47) while Olimpica registers COP 12.79 thousand sales per sq meter (≈ EUR 5.52)22 (see Exhibit 48)23. Hence, our estimates lead us to believe that JM will be able to be selling COP 15.25 (≈ EUR 5.3024 p/ sq m) by 2025 (see Exhibit 49).
21
The second one would be Carrefour that was sold this year to Chilean Cencosud (as already referred)
22
Discounted at current spot rate – 2,317
23 Exito’s 8.4% EBITDA margin is for the entire busines.
The company does not provide EBITDA breakdown per business
24
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 23/37 Source: Company Data and Nova Research Team
Exhibit 50: Colombia Operational Forecasts (20013-25) The structure is defined
and JM expects minimum of 150 stores by 2015...
Negative margins for the first years but high sales growth...
JM announced that the basic structure of the business is concluded: i) teams are selected, ii) brand, iii) communication, iv) suppliers, v) distribution centre being finalized, as well as first stores ready to be opened. It has also announced that by 2015 wants to have a minimum of 150 opened stores. Therefore, in line with the
company’s goal of being in the top 3 retailers by 2015 and with its experience in this area we anticipate the opening of c.100 stores per year for the next three years having the Group opened 330 stores 2015. Despite this, we do not anticipate JM to be selling over EUR 1,2bn before 2017. By 2025 we estimate JM will have around 980 operating stores. Concerning the amount of square meters both comparables own stores with an average area between 630-950 thousand sq meters and so it seemed reasonable to us to assume for JM an average 850,000 sq meters per store.
During the first 3 years of operations we do not anticipate positive EBITDA margins due to the amount of costs the company will have to support before revenues overcome losses. However in 2020 we believe JM will be able to reach a margin around 6.2%. On the other hand, the company will register negative EBIT margins for a little longer due to depreciations overcoming EBITDA. We anticipate EUR 0.12 per sq meter, in line with Biedronka’s hard discount format
value. Depreciations are in line with the useful life of 15 years the company determines for basic equipment (see Exhibit 50).
Capex and Working Capital
For these items we have used the information provided by Jerónimo as well as our estimations regarding the growth strategy outlined by the company. After last
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 24/37 Source: Company Data and Nova Research Team
Exhibit 52: Capex Breakdown per Business (2012-20)
Source: Company data and Nova Research Team
Exhibit 51: Capex Breakdown per Type of Investment (2012-20)
Investment’s biggest slice still allocated in Poland...
20mn in each) as it tries to accompany the store expansion25. Hence, according
to our store opening estimation we expect the company to inaugurate at least 5 more new DC until 2015 (one in Colombia and four more in Poland).
Furthermore, at least every 7 years, stores suffer a revamp to an updated layout26, and we inferred an investment of EUR 370mn for this activity for the next three years. Still, the biggest slice of the investment is attributed to store expansion that will occur mainly in Poland and now Colombia. In Exhibit 51 it is possible to observe our assessment by capex type. In 2012 total investment represented c.6.5% of revenues. We think this percentage will continue to decrease as the volume of sales increases and expansion starts to stabilize in Poland, accounting for 2.2% in 2020.
Exhibit 52 complements this analysis as we can understand the weight of the investment in each business. In Portugal, as the market is becoming more and more saturated we believe JM will open around 15 Pingo Doce stores in the continent and none in Madeira for the next 8 years and we do not anticipate any openings after that period. Thus, our estimations of investment for this insignia fall mainly on store remodelling and maintenance, EUR c.290mn for the next 3
25
Each DC serves up to 200 stores (JM statement)
26
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 25/37 Source: Company Data and Nova Research Team
Exhibit 54: JM Sales Breakdown 1H2012
Source: Bloomberg
Exhibit 55: JM and its Peers NWC in Days
Source: Fundação Francisco Manuel dos Santos
years. On the other hand, in Poland the Portuguese retailer is leader in a market that still has space to grow and, as we have seen earlier, is its main focus of investment. Of the total investment plan announced for the next three years 75% are going directly to Biedronka. The polish segment has just opened store 2,000 on October of this year but the ambition is to reach 3,000 stores in 2015, a goal that we think is achievable due to the fact that i) is the market leader and the most recognized brand by Poles ii) the knowledge the company already has on this market, iii) financial soundness and the amount of investment channelled to this operation alone (EUR 1.1bn 2013-15). Concerning the Colombian operation the Group announced the intention to invest EUR 400mn until 2015 to open the first stores and reach the top 3 by that year having opened around 330 stores by then. Thus, we estimate that JM already invested EUR c.60mn with the construction of the first stores in 2012 as well as the DC and will invest EUR c.300mn until 2015.
Regarding the net working capital we observe an improvement in its efficiency as well as in short term financial health (see Exhibit 53). Despite the increase in the average collection period, where we take into account the increasing difficulties suppliers and clients will struggle with at the time of paying the bill. However this value will decrease to 9 days by 2020. On the other hand we believe the company will be paying to its suppliers in around 74 days, while the average replacement of the stock will decrease to 14 days as perishables need constant replacement and already represent c.30% of customers’ purchases (see Exhibit 54). Furthermore it is possible to compare these indicators with JM European big players in Exhibit 55.
Valuation
In order to proceed with the valuation of the business we chose the SOTP method as well as the multiples of the comparable companies. Since Jerónimo Martins has operations in Portugal, Poland and most recently in Colombia, we valued each business according to the characteristics of the country where it is operating.
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 26/37
Exhibit 56: Rating Classification per Country in 2012
Source: Bloomberg
Germany is the country with lowest default risk in Euro area...
Cost of Equity
The cost of equity was calculated through the Capital Asset Pricing Model27. To convert the risk free rate we have to use an yield that incorporates the least default risk possible. Thus, the alternative to a corporate bond yield is a Government one since the latter has financial mechanisms that allow it to control currency fluctuations decreasing the risk factor. Hence, we chose as the basis of the risk free rate a 10 year government bond yield denominated in local currency. However, and as mentioned, the Group operates in three different countries with three different currencies of which none of them is currently classified as a risk free one (see Exhibit 56).
According to the three main rating agencies Germany is the country in the Euro area with the lowest default risk. Hence, since it trades in the same currency as Portugal we took 10 years of daily German government bond yield as the risk free rate for this country. Concerning Poland and Colombia, we proceeded to the conversion of the free cash flows from its original currency to Euros right before discounting to WACC, hence as the German risk free is already in the same currency we have applied the same rate for the three countries.
To estimate beta we compared two different approaches in order to get a beta range: i) the unlevered beta of the industry and ii) the average unlevered beta of comparables (see Exhibit 57). The first step was to obtain an industry unlevered beta range which we took from both Bloomberg and Damodaran’s data base
[0.58 – 1.08]. Secondly we searched for the betas of the companies that presented a business structure similar to our company (e.g. format, capital structure, EBITDA margin, rating) which is possible to observe in the above exhibit. Here, we proceeded to find another interval in which one of the limits was the average beta of the companies that only operate in the hard discount formats (marked with *) and the other limit are these same chains plus the ones that operate as well within the supermarket layout (marked as **). We made this distinction because we believe chains operating only in the hard discount format
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 27/37 Source: Bloomberg and Nova Research Team
Exhibit 57: Comparable Characteristics 2012
may present a higher beta value than companies operating with a more diversifiable business formats as there is not as much pressure in margins.
Furthermore we have to take into consideration the fact that a significant part of JM value comes from Pingo Doce that operates with supermarkets. With the levered betas28 of each company we proceeded to the deleverage process through market D/E ratio of each company. With these values, we obtained a range of [0.54; 0.62]. Hence, within the purposed interval, we believe 0.8 is a good estimate of what would be the true beta of the company. After this we
“releveraged” this estimate to the target long term capital structure of the company (50%), obtaining three different betas for the different geographies. Concerning the market risk premium we have assumed, in a long term perspective, the market to produce a 6% premium29.
Cost of Debt
Jerónimo Martins does not have a credit rating (neither his major peer Sonae), besides, the bonds it has been issuing are under EUR 100,000mn which we consider as not being liquid enough to compute a suitable cost of debt.
28
Beta – 2 years of weekly data relative to the MSCI World index
29
JERÓNIMO MARTINS,SGPS COMPANY REPORT
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Exhibit 58: Characteristics of Issued Bonds
Source: Bloomberg and Nova Research Team
Exhibit 59: Cost of Debt
Source: Nova Research Team
We took unto
consideration bonds issued by JM peers...
On the other hand, we have been witnessing an increase in bond issuance of Portuguese companies targeting private small investors, which made us turn to these other big Portuguese players and international retail companies with the intention of obtaining a cost of debt range that translates either the increasing yields of the national market as well as the company’s financial structure. In
Exhibit 58 we can observe the characteristics of bonds issued by the Portuguese main companies, as well as JM international peers. As we have obtained several yields for a different number of maturities we have resorted on Bloomberg’s
Industrial yield curve in order to understand what would be the value of the yield in case these companies issued a 10 year bond. For the BBB rated companies the converted yield would be around 2.9% while for the BB Portuguese rated companies these value increases to c.5.3%. Since the bond issuance would be made by the parent company, we took into consideration the Portuguese and Dutch30 prevailing yields, applying a cost of debt equal for the three countries. We have assumed this rate as the basis to our cost of debt calculations for the three businesses, which we will now develop. Since our company operates in three different currencies we had to take inflation effect31 and the results can be
observed in Exhibit 59. Furthermore, we also have to take into consideration the probability of default of the company as well as the recovery rate in case the same enters in distress32. The assumptions on both the recovery rate and probability of default were made based Moody’s report on this subject. Thus, we believe the first one to be around 85% as the retail business is a significant liquid one due to the amount of assets it has available, while the probability of default for this company we believe it to be around 6%.
30
On the 30th of December of 2011 Sociedade Francisco Manuel dos Santos (SFMS) SGPS sold its 56% share in JM to its subsidiary SFMS BV based in the Netherlands. Hence, we believe the company might consider issuing debt in this country.
31
𝑅𝑙𝑐= 1 +𝑅𝑓𝑐 ∗1+𝜋𝑙𝑐
1+𝜋𝑓𝑐, where Rlc stands for rate of local currency and Rfc is rate of foreign currency
JERÓNIMO MARTINS,SGPS COMPANY REPORT
PAGE 29/37 Source: Nova Research Estimates
Exhibit 60: DCF Assumptions
Exhibit 61: Sum of the Parts Valuation Summary We believe Colombia and
Poland offer good growth potential...
In Exhibit 60 we have the different WACC rates at which we will discount the individual free cash flows of each of the business units. We obtained 8.64%, 9.38% and 8.57% for Portugal, Poland and Colombia respectively. For the continuation value of all segments we assumed a nominal different growth rate according to the future market possibilities and taking into consideration industry saturation. The Portuguese market we believe it does not offer a very attractive growth possibility as it’s reaching its saturation phase. Thus, we attributed it a 1.5% rate, in line with predicted future inflation. On the other hand the Polish and the Colombian markets still offer development opportunities both being significantly fragmented providing good growth opportunities. For this reason we anticipate a nominal growth rate of 3% for Poland, c.1% above expected inflation while for Colombia we wanted to take a careful approach expecting c.2% real growth for this business.
In Exhibit 61 we present a summary of the present value of each Jerónimo Martins business. Biedronka is clearly the most valuable asset of the company providing c.79% of the total value of the company. In addition we also assess the Colombian business to contribute with c.8% for the company value.
