Upgrade on a stronger outlook despite risks on retail tax
We upgrade Jeronimo Martins today on a) a stronger outlook in Poland driving higher EBIT forecasts and
good cash generation, and b) a positive €450m valuation for the Colombian business, Ara (previously
valued at zero), as we look in more detail at the operations. While the details of the Polish retail tax are
still undecided, we feel the risks are well known and the market may be too cautious on Jeronimo's
long-term ability to pass this through.
Solid LFL growth helps margin expansion and further cash returns could come
The repositioned businesses of Biedronka (evolving from soft discounter towards value supermarket) and
Pingo Doce (from affluent into value supermarket) are once again delivering sound LFL sales growth.
With deflationary pressures slowly easing and a more benign competitive environment, we expect salesdriven
margin expansion to continue. Sound cash-flow generation, lack of debt on balance sheet and the
possible disposal of its manufacturing and services business should boost ROIC and may also result in
another wave of special dividends, as seen in 2015.
Colombia a drag currently but a sizeable future opportunity
While we expect Ara to be in the red until 2019, the business appears to be gaining traction with
customers as sales densities grew c.40% in 2015. However, this is from a low base and the business still
has some way to go before breakeven, we believe. Logistics challenges also remain as infrastructure and
cultural barriers in the country create complexity. The company intends to have 1,000 Ara stores in 2020
(vs. c150 currently) with c€500-600m capex over the five-year period (circa one-fifth of total capex).
Valuation: Demanding but not as expensive as it seems
Jeronimo has traded on an average EV/EBIT of 15.6x over the past 10 years, and if we adjust for the
negative impact of the loss-making Colombian business, then it currently trades on 13x EV/EBIT, on our
2017 forecasts. We value the business on a blended 16.6x EV/EBIT for 2017e, a premium to the sector's
11.8x, reflecting high returns and growth potential. Our price target rises to €16 as a result of: (1) higher
EBIT forecast; (2) lower net debt estimate; and (3) positive €450m valuation of Ara (zero previously).