Description

Summary

Europris is Norway’s leading discount variety store (similar to Dollar General) that was listed on the Norwegian stock exchange in June 2015. After a successful oversubscribed IPO at 43 NOK, the company has disappointed relative to expectations and the shares have traded down to 22 NOK. The initial private equity overhang is now gone and expectations are rock bottom, which makes it a compelling setup. With an owner earning’s yield of 12% (divi yield at 7.7%) and the opportunity to reinvest capital at great RoIC (>20%) the stock is a good buy.

Company description

Europris was founded in 1992 and has today 257 (o/w c40 franchised) discount stores around Norway with total system wide revenues of NOK 5.9m in 2017. Its assortments are Home & Kitchen, Hobby & Office, Handyman, House & Garden, Sports & Leisure, Electronics, Clothes & Shoes, Groceries, Candy & Chocolate, Personal Care, Laundry and Cleaning, and Pets. It is the largest discount store in Norway now ahead of Clas Ohlson, Nille, Jula, Biltema and Rustad. The product overlap with competitors is around 20-30% except for Rustad which is around 60%.

Europris should have some economies of scale that will be difficult for its competitors to replicate. Not only does it have more stores than its competitors, it also has a sourcing agreement with Tokmanni in Finland which helps it gain scale on procurement. It recently acquired 20% of O&B in Sweden making its total sourcing group (including Tokmanni) account for NOK 17.1bn of sales. This should provide some economies of scale that for example Rustad cannot replicate which only has chain sales of 4bn NOK (Norway, Sweden, Finland and Germany). The combined group (Europris and O&B) is now larger than Tokmanni that might give some benefits when it comes to negotiating the JV procurement agreement.

Recent developments

Europris listed as a growth story, having grown its revenue by 10% CAGR over the past decade and strong LFL growth above the market (4-5%). However, in recent years the growth has slowed as competition is stronger and simply that it is harder to grow of a larger base. An important factor investors seem to be ignoring is that Europris went from modernizing over 50 stores per annum down to 30 and is now doing around 10 per annum. Surely this has had an impact on LFL growth as recently refurbished stores tend to drive higher traffic post re-opening. The slower growth has disappointed investors who bought into the IPO growth story and the stock has almost halved. In the most recent H1 2018, Europris delivered a total growth of 4.4% and LFL of 0.8%, which is not strong enough to combat cost inflation in Norway and investors seem to have given up on Europris ever recovering.

It has recently opened its online store and invested in a centralized fulfillment center in Moss. The latter should boost margins by 50-100 bps when the previous 5 centers are closed (subject to lease expiry etc). The new fulfillment center increase capacity by 34% while reducing rental space by 13% due to efficiencies.

Unit economics and capital allocation

Europris has proven that its concept produces very good unit economics with an average payback period of c4 years on all capital committed (capex + inventory). On average, stores opened in 2015 produce 20m NOK of revenues, 1.4m NOK EBITDA on 2.1m of capex and 3.9m NOK of inventory.

With this kind of unit economics, it would be great if the company could reinvest loads of capital. However, the company has said that it believes the market can handle about 300 stores, so it opens about 10 stores per year. In addition, it has been investing in modernizing its stores which the company believes will help drive traffic. Further, it is buying back stores from its franchise partners as another way to deploy capital.

The company has been paying out a steady and increasing dividend since its IPO, and recently launched a buyback program of up to 2m shares. Although the buyback program is insignificant in the grand scheme of things, it is good to see that management has opened up for share buybacks.

Market

As a category, the discount variety retail market in Norway has grown at a CAGR of 16% since 2000 while total retail has only grown 4%. Despite this strong growth, discount retail only has a 8% penetration which is very low compared to countries like Germany (35%), Portugal (15%), Finland (13%), which supports continued growth for this segment.

Valuation

Based on Q2 2018 reported figures, Europris trades at 9.2x Adj. EPS TTM and 8.1x Adj. EBITDA TTM. The company charges higher depreciation through its accounts than the required maintenance capex per store. On an owner’s earnings basis using the correct maintenance capex, Europris trades closer to 8.5x which is too cheap for a company that can still reinvest capital at RoIC north of 20%.

The company currently pays out 1.7 NOK per share in dividend which gives a yield of 7.7% at today’s share price and has increased its dividend every year since IPO. The dividend consumes about 280m NOK of cash vs CFO above 500m NOK and maintenance capex of about 50m. This means the company’s dividend is very well protected, especially as the company will slow down opening new stores, buy back fewer franchised stores (only 40 left), and finish the store modernization program.

Risks

Competition: Rusta entered the Norwegian market in 2014 and was profitable on its first store. Although Europris has some economies of scale it is a risk that the current profitability in the industry is too high and will be competed away as competitors continue to open stores.

Chairman: Tom Vidar Rygh is an advisor to the Nordic Capital Fund and still serves as the Chairman of Europris even though Nordic Capital has sold out. There is a risk that Tom is not as focused on Europris’ success now that the fund has entirely sold out of the business.

Capital allocation: The company recently agreed to buy 20% of ÖoB at 7.7x 2018 EBITDA and has an option to acquire the remaining 80% in 2020 at the same multiple. Although the transaction in itself looks reasonable (treating it as value neutral), there is a risk that Europris is too focused on growth (now going after the Swedish market as well) rather than focusing on optimizing the cost structure within its existing network. Any other questionable capital allocation decisions would be a red flag.

Catalyst

• Change of sentiment
• Easier comps
• Increased buyback / dividend