Description

EUROCASH

Summary

Eurocash is a Polish company operating in three divisions (none of which is fintech-related!):

1. Wholesale: the largest FMCG wholesaler in Poland
2. Retail: owned & franchised supermarket operations
3. Projects: the largest online grocer in Poland & other new concepts

The company has significant competitive advantages and the sum of the parts is significantly worth more than the current market cap. Under the refreshed leadership of CEO Pawel Surowka, significant earnings growth over the coming couple years could lead to 3-5x the current share price.

History

In 1995, Luis Amaral moved to Poland to help Portuguese-based Jeronimo Martins launch its now famous Biedronka chain of discounters. Following this success, he was promoted to a higher position for Jeronimo Martins back in Lisbon, which in his words, “was extremely boring.” Six months later, Luis resigned and went to Brazil to work in turnarounds. In 2003, he decided to return to Poland. JM wanted to focus on Biedronka and sell Eurocash, its traditional trade distributor. Luis chose to buy the company and led it successfully over the following 20 years.

Luis believed that unlike other European countries, Poles didn’t want hypermarkets (small apartments/fridges and population dispersion). He also believed that the country’s small independent supermarkets in Poland were being destroyed by the rise in discounters and believed he could pass on the scale benefits of a growing wholesaler to these small markets. To increase his buying power and therefore scale, Luis performed many acquisitions and Eurocash became the largest wholesaler in Poland with a market share of approximately 30%. But over the past few years prior to COVID, the company’s growth began to slow and no further acquisitions would be permitted due to antitrust. Luis then begin to deliberate two options – either pursue wholesale outside of Poland or remain in Poland but expand into retail. He chose the latter – a strategy that has thus far not met expectations – and ultimately Luis decided that fresh leadership was vital for the company. He hired Pawel Surowka – a seasoned Polish executive - to lead the company starting January 2022.

Management

Pawel Surowka was born in Krakow but moved to Germany at the age of six. He studied philosophy, history, and political science in university and has a successful history in both turnarounds (Boryszew Group) and professional management (president of PZU – Poland’s largest insurer and fifth largest company by market cap today). After meeting with Amaral, he realized that the Portuguese was an incredible visionary but his strength did not lie in “procedures.” Pawel believed that simple improvement to general management would radically transform the company. He has thus far performed very well.

Business

Wholesale is Eurocash’s largest division and consists primarily of Distribution (FMCG distribution), Service (tobacco distribution), and Cash & Carry (178 discount wholesale stores). In 2022, wholesale generated a little more than 22bn PLN in sales and 580m in EBIT (2.6% margin). The overall market is around 70bn in size (Eurocash has approximately 30% market share) and Eurocash is multiple times larger than its closest competitors. Over the coming 10 years, Eurocash will increase its share organically as competitors with inferior scale disappear. However, it is important to note that the end market is not growing because Eurocash’s customers here consist of small supermarkets which have historically lost shares to discounters (but have stabilized in recent years as a reduced number of units has led to increasing sales per remaining unit).

Retail consists of owned/partnered supermarkets and franchised supermarkets (nearly 16k outlets in total). The former have underperformed expectations, the reason being that it was difficult for a “wholesaler” to adapt its mentality to that of a retailer (simply put, the company prioritized wholesale profitability to the detriment of its retailers). In contrast, the franchised retail operations have been performing quite well. In 2022, retail earned 7.7bn PLN in sales and a little more than 100m in EBIT (1.33%). Although retail consists of several different banners under different franchise arrangements (hard franchise – buy from and follow strict rules from Eurocash, to soft – utilize a brand but have little in the way of requirements), as a combined entity the operation would be the second largest retailer in Poland after Biedronka. Pawel believes that retail should better utilize these advantages as opposed to simply being an afterthought to the “cash cow” of whoelsale. Over time, profitability in retail will continue to improve or the owned stores will be sold at the right valuation.

The Projects division primarily includes Eurocash’s online grocer Frisco as well as its alcohol retailer Duzy Ben. Eurocash acquired Frisco from Poland private equity firm MCI just before the COVID crisis (fortuitous timing/valuation). Since then, Frisco’s sales have skyrocketed nearly 4x in 5 years and the company is the leading e-grocer in Poland (the company is loss-making due to continued expansion into new Polish cities). Over the coming years, the asset will likely be IPO’d or spun off into a newly-listed entity (to better align the type of investors interested in the asset – supermarket value investors aren’t exactly the type) or the company may raise funds privately for the asset in order to accelerate its growth. The other interesting asset in Projects is a chain of alcohol stores called Duzy Ben. Revenues have grown roughly 8x in 5 years and the company will be breakeven this year.

Valuation

Eurocash has a market cap of 2bn PLN. 2022 pre-IFRS 16 EBITDA (i.e., after lease expense) was around 570m. Management’s goal is 1bn PLN in 2025. Around 100m of this growth will come simply from shuttering negative projects, and the majority of the balance will come from integrating the different segments of wholesale (both in buying and logistics – much of which shockingly takes place separately among FMCG distribution, tobacco distribution, and cash & carry) as well as improved buying power (again, a result of inter-division communication). After maintenance capex, interest expense, and taxes, FCF would be around 600m and Eurocash would likely be worth 6-10bn PLN (3-5x from today’s prices). It is important to recognize that this earnings growth assumes little in the way of growth or operating leverage, but mostly involves tackling the company’s significant inefficiency (a result of numerous acquisitions and simply put, being run like a family business). Growth in the business could lead to a substantially higher valuation.

Risks

Polish economy, politics, or FX depreciation

Catalyst

Earnings growth