Description

EUROPRIS (EPR NO Equity)

A solid company with an impressive track record

I will keep this write-up short and sweet: Europris is a cheap, growing quality retailer (of mostly lower quality items) available at an attractive price. It should provide investors with a double digit annual return with medium risk attached.

Europris is well managed and has grown the top line 29 years in a row (!) to >8 Bn NOK, and has grown LFL sales above the market for six straight years (2.8 percentage points above market on average in the period). It has 268 locations, all of them LFL profitable in 2020 (5 new stores can be expected per year going forward according to recent company guidance). 

How did they do it? Constant focus on efficient sourcing, strengthening EPR's price and cost position, improving the customer experience and finding new ways to drive customer growth like introducing more higher value seasonal items and new product categories has made it possible. The strategy is simple, but not easy to execute, however EPR does it well and I think it's likely they will continue to do so.

EPR is widely considered to be the category leader in "discount variety" (lots of cheap crap plus grocery is a less polite description) in Norway and strives to offer a wide selection and to be the price leader. It has a market share of roughly 30% (slightly down from 32% in 2005, but stable since 2012) and the closest competitors are Clas Ohlsson, Nille and Jula. Rusta is the fastest growing competitor, and the only one to have a mid teens EBITDA margin coming close to EPR (but it only has a 6% market share). 

History

• 1992 – Europris founded, the first store opened in Sandnes

• 2006 – Europris decided to expand outside Norway

• 2012 – Europris was acquired by Nordic Capital for a total consideration (DNB estimate) of NOK3.3bn (market cap NOK2.1bn), valuing it at an EV/sales of 1x

• 2015 – Europris listed with an approximate market cap of NOK7.5bn and an EV of NOK9.1bn. Ambitions were to grow the # of stores from 227 to 270 by 2020.

• 2021 - Europris reports record results and margins and announces purchase of online toy retailer Lekekassen. From 2019 to 2021, the company added over 600k members to its customer club, suggesting increased customer stickiness going forward.

EBITDA margin and ROE, 2012-2020

Revenue development 2012-2020

EPS & DPS

Why is this interesting now?

1. Reopening fears appear overdone

During the COVID-pandemic, EPR appears to have been a beneficiary of decreased travel and focus on home improvement and the like. The bear case is that margins will revert to pre-pandemic levels, but I don’t think that will happen, at least not fully (even if EBITDA margins do revert to 2019 levels, the company is cheap). I think the fears of weak comparable results post-pandemic are overdone and that a lot of the new customers who have discovered EPR during the pandemic will continue to visit EPR stores. Furthermore, EPR’s investment in a new central warehouse in Moss is going to increase efficiency (e.g through the use of an automated picking system in the low bay area), the company expects that the savings will become visible in the results from 2022 (estimated to be about 1% of revenues annually).

EPR's growth prospects seem decent even if fast expansion in terms of new stores is unlikely: the customers are increasing their basket sizes and visiting more frequently, and adding Lekekassen to the portfolio should also contribute positively. The company is also planning more city concept stores with a smaller footprint going forward. E-commerce provides the company with the opportunity to access new customer groups and market in new channels, and while e-commerce revenues are small today, this business is growing quickly. EPR also owns 67% of lunehjem.no, a fully online home and interior concept that is growing both on the top and bottom line, but the revenue contribution from here is marginal at only about 21m NOK to EPR.

This is a subjective opinion, but I think EPR also has become a much better place to shop than it was say four or five years ago, the store layout isn't as chaotic as it used to be, and the company has gotten much better at stocking seasonal items in demand and adding new categories like kitchen items for example. 

The reported figures from Q2 this year were certainly impressive:

• Despite a 5% top line decline yoy in the quarter, the H1 results were up 6% yoy.

• The quarterly decline was mostly due to >20% of stores being closed as a result of Covid lockdowns.

• EPR increased its gross margin by 2% when adjusting for positive currency effects

• Reduced its opex/sales ratio from 24.2 to 23,7%

• Reported an 11% EBITDA increase yoy as well as a record EBITDA margin of 25.6%.

• Also of note: e-commerce revenues, which only comprise 4% of sales today, grew by 66% yoy.

Moreover, in Q2 EPR also announced the acquisition of 67% of Lekekassen in cash, valuing Lekekassen at 750m NOK on a 100% basis. Lekekassen is Norway's largest online toy retailer. Lekekassen sells around 10k products online in Norway, Sweden and Denmark (toyspace.dk, launches in Q4). It was bought at a price about equal to EV/EBITDA 8x, which seems reasonable for a fast growing company that complements EPR's offering (top line/EBITDA CAGR of 187%/488% from 2018 to 2020). Roughly 600m NOK in revenues for 2021 seems realistic. Assuming an EBITDA margin for Lekekassen slightly above 2020 at 15% and multiplying the resulting figure by 0.67 (EPR's stake), Lekekassen would contribute at least 60m to EPR's total EBITDA if it were fully consolidated in 2021, it will be from next year on. There should be some synergies in terms of freight, sourcing etc here as well, I'm not assuming any. EPR has a pre-emptive right to acquire the rest of the company. 

The bottom line is that this company is doing well, even if the top line might see a dip on yoy figures as a whole when society and border trade reopens completely in the fall (maybe). We hope anyway. (Regarding the border trade: Norwegians like to think they save money by driving for hours to Sweden in their gas-guzzling SUV's to shop marginally cheaper goods). 

2. The valuation is still very reasonable despite the strong share price performance

I expect only 2% organic top line growth from core EPR until 2023e. No heroic assumptions here. Conservatively assuming a further 700m revenue contribution from Lekekassen in 2023, the total revenues should approach 9.2 Bn NOK in 2023. Taking into account that EBITDA margins will probably come back a bit from current levels and using an 18% EBITDA margin assumption (in line with FY 2019 and down from 23% last year) on 8.5 Bn of revs, core EPR produces 1.53 Bn in EBITDA. Adding to that 70m EBITDA from Lekekassen and total EBITDA should be about 1.6 Bn NOK in 2023.

Assuming net debt of around 2.5 Bn in 2023 slightly down from around 3 Bn at the end of last year, the company then trades just below 8x EV/EBITDA on 2023 estimates. I think that's too cheap for a low-cyclical company that I think can continue its top line growth at 3-5% over the longer term (that is beyond 2023. That long term assumption is about half the trailing 5-year top-line CAGR) and which has a 5-year median ROE of 24%. 

At a target multiple of 10x 2023 EV/EBITDA, EPR should reach 81 NOK by 2023. For reference, 10x is what Tokmanni Group (TOKMAN FH Equity), the closest Nordic peer in my view, is trading at currently. If it reaches 81 NOK, investors are looking at a CAGR of 12% until 2023e. I think this is a fairly conservative case, should they manage to maintain EBITDA margins at 20%, EV/EBITDA 10 implies a 90 NOK share price and an expected CAGR of 17% by then. A higher multiple in line with many other international discount peers implies even further upside.

While they wait for EPR to reach fair value, investors can expect a dividend of about 4% annually, and there should be some room to increase the payout ratio as well or pay down debt a little quicker.

Risks:

• Competitors like Rusta and Jula increasing expansion efforts in Norway and putting pressure on EPR margins and growth rate

• Border trade reopening reducing traffic markedly

• FX risk as the company sources in Asia and sells in NOK 

• Lekekassen acquisition ending up being a failure

Catalyst

Time, increased dividends