Jeronimo Martins. Part 3 - Financials and R/O

Financials

Firstly, let’s have a look at the reported income statements. Three metrics the company places great focus on are the like for like sales growth, Sales per square meter and the EBITDA margin.

In the figure below a comparison between the LFL (like-for-like) sales growth, sales per square meter (sales/sqm) and weighted average of the countries where the company operates is presented. It can be observed that sales accelerate at a faster pace than inflation.

If figures were broken down by banner, it would be observed that the Portuguese ones - Pingo Doce and Recheio - show no Sales/sqm growth in the last 5 years (see figure below). As they are the most mature banners, it is expected that their shops are optimized to the extent possible and that growth mainly comes from price increases and network expansion.

Jeronimo Martins margins are one of the best among the competitors. Only Dino Polska shows better ones. Although, when looking at Biedronka’s EBITDA margin, it has also been around 9% for the last 5 years. Considering its wide geographical distribution and variety of banners, a more accurate comparison would be set versus Carrefour.

Balance sheet

Jeronimo Martins is a conservative managed company. Its balance sheet reflects so. From the balance sheet it can be found:

1. Equity/Assets = 0.6

2. Long-term debt/Net earnings = 4.63

3. Net debt/Equity = 0.53

4. Short-term debt/EBITDA = 3.5

5. Interest coverage ratio = 6.89

6. Preferred amount of stock is approximately 6 million euros.

7. Net debt/EBITDA = 0.9

From ratios above it might look like debt is not conservatively covered by cash generated by operations. Although, it should be considered the company holds a net cash position of 1781 million euros.

Profitability

The return ratios show a consistently profitable company with ROE & ROCE ratio >20%. ROIC during the last 5 to 6 years has been in the range of 8 - 9%, slightly higher than WACC (approximately 8% during the same period). As professor Aswath Damodaran says, ROIC is a metric which looks into the past. What the company ROIC reflects is that the heavy investment on Ara banner during the last years has not been profitable until the moment. However, from this year onwards Ara its expected to break even so ROIC ratio should expand.

Regarding ROA, it is around 5.5 - 6%. Consistent low ROA are typical of asset heavy business and indirectly indicate a barrier of entry to new players. The creation of a food distribution network, from manufacturers to supermarkets including distribution centers is extremely costly and takes time. This is considered an important competitive advantage of this kind of business.

Moreover, the company pays a dividend (40-50% payout ratio) which has widely varied (2 to 6%) during the last 10 years. The dividend yearly CAGR during that period has been 6.5%.

Valuation

DCF model has been run up to 10 years to estimate share fair value. The following data has been considered for a conservative scenario:

• 5% CAGR FCF. Last 7 years, the FCF CAGR was 7%.

• WACC = 8.5%.

• FCF (2023, in million): 1208.

• Number of shares = 629.3 million.

Fair value is estimated to be 34.45 €/share what implies a safety margin of 31.8%.

Risks and opportunities

• Persistent inflation

  Food retailers are assuming on their margins part of the inflation impact in order to stimulate the weak consumer sentiment. In case of persisting inflation margins, and consequently earnings, will continue to be adversely impacted.

• Expansion execution

  Portuguese market expansion its close to saturation as the plain revenue growth per square meter shows

  Ara expansion should have surpassed the most challenging phase: establishing the banner in the country, gaining a substantial market share and developing a supply chain network. However, the banner is breaking even during 2023. Then challenges on its

• Adaptation to new trends

  Most of the group’s banners are on cities and densely populated areas where competition is larger and food trend can quickly shift. Moreover, efficiency and digitalization is highly valued by customers on that environment. Hence, the group is facing the constant challenge of not falling behind on these new trends.

The main opportunities Jeronimo Martins is facing are:

• Central Europe expansion

  Now that Ara is breaking even, the company can focus on the expansion to other countries. Historically, Jeronimo Martins has focused on expanding to countries with suitable and similar shopping cultures so the same strategy can be executed.

  Biedronka’s CEO, Luis Araujo, at the end of March 2023 confirmed the identification of two new potential markets of interest for Biedronka’s expansion:

  “Slovakia is a country neighboring Poland and has a similar shopping culture. Many Slovaks cross borders and come to Poland for shopping in Biedronka, which is why we take into account our investments in this country. Our interest is also in Romania”

• Fragmented industry

  Food retail is a fragmented industry where a variety of last-kilometer shops, mom-and-pop shops and convenience stores hold a remarkable share of the market.

  Economies of scale, successful vertical integration to offer better quality products and the integration of local products will play a key role in gaining market share from smaller heterogeneous players.

• Further vertical integration and private brands

  The offer of higher quality and differentiated products plus a better cost control will boosts the group’s economies of scale. Main focus is currently placed on aquaculture business (vs meat offer of Dino Polska ) and dairy products offered from Portugal on Poland. Furthermore, promotion of private brand products will lead to margin expansion.