Description
Jumbo is worth low EUR 20s per share vs. price of EUR 14. It should do 1.4 EPS post covid, 10x earnings incl. excess cash and 7.5x P/E ex cash, 6% dividend yield. That is very cheap given growth of high single digit. 50% discount to comps. Thesis spelled out in more detail below.
Description of business
- High quality discount retailer with 80 hypermarkets in Greece and Eastern Europe, located in outskirts of large cities. “Combination of a Walmart and Target store”. Sales is split 60% Greece, 20% Romania, 10% Cyprus and 10% Bulgaria. Jumbo also has franchise agreements with companies for 26 stores in 6 non EU countries in the Balkans. Recently signed agreement for Israeli company to open stores in Israel
- Target customer is cash strapped family. Can buy things cheaper than supermarket
- Products include toys (20%), home products (30%), seasonal products (25%), baby (5%), stationary for kids (5%). They carry 40,000 products with avg. selling price of EUR 5 (but most items 2-3 EUR). Avg. basket size approx. EUR 20
- No products with expiry – no food, fashion or electronics
- c. 60% unbranded, 40% branded
- Seasonality – c. 28% of sale in December (Christmas), 10% in April (Easter), 10% in September (back to school)
- Market leader in Greece within core offering of toys/baby/stationary products (1/3 of sales)
- Greek market share of 40% in core offering in 2015, 9% other specialist, 30% mom and pop, 20% super markets & hyppermarkets
o Children/toys 40% market share
o 20-30% market share in other categories
- Avg. store is 9,000 gross SQM / 6000 SQM effective selling space, however, new stores 12,500 gross / 9,000 net
- Adding 2-4 new stores per year, mainly in Eastern Europe
- Unit economics 20% ROIC if owning real estate and 40% if renting
- 80% of products dollar denominated
o Transportation 20-35% of the cost of the product
- Cost: COGS (48% of sales), General (23%), Admin (3%)
o 50% of SG&A is wages
o Advertising 1% of sales
o Rent 3-5% of sales (however, majority paid to own propcos)
- Does have online store in Greece (5% of sales), opening in Romania as well
- Approx. 60% of buildings free hold (book value 500m+), 40% leasehold
- 1.5x sales growth vs GDP historically
- No supplier above 5%
- 500EUR per worker in store
Thesis:
- Business at 5x EV/EBITDA, comps at 10-15x
o 10x P/E or 7.5x ex cash vs. 15-25x for comps
o Post covid, EPS c. EUR 1.4 (2022)
- Good business with high ROIC. Discount retailing has been one of few retail categories doing exceptionally well over past 10 years
o Competitive advantages:
§ Low prices due to low cost of products and running business – extreme cost culture I haven’t seen anywhere else, driven by owner operator who has been through horrible Greek crisis and is obsessed with cost, they buy directly from china (very long term and strong relations with Chinese suppliers), they buy in huge quantities etc.
§ Brand – especially in Greece
§ Infrastructure and store locations
§ Assortment tailored to specific countries
- Long growth runway
o New store openings:
§ They want to go from 14 to 25 stores in romania – people don’t think they can go higher, but actually possibility to go a lot higher in Romania
§ Might expand in border countries post Romania
§ Expanding with franchises – Israel could be big
§ Post tax ROIC on new store c. 20% on owned stores and 40%+ on rented
§ Each new store contributes c. 2-2.5c of earnings
o LfL
§ Grow with disposable income (greece still at cyclical low) + some market share gain
§ Competitors weakened by covid
§ They open stores relatively slowly – means they don’t cannibalized other stores as much as other discount retailers, thereby supporting LfL
§ Stores are maturing over 2-3 years – so some stores are still not mature in Romania
- Great owner-operator (Mr. Vakakis)
o Owner-operator, owns 20%, has build company from nothing
o Only asset of owner-operator
o Long track record of underpromise and overdeliver
o Pays himself close to nothing
- Downside protection
o Lowest cost provider – so in recession, customer likely to trade down, mitigating some of impact
o Have a lot of assets - cash building up, a lot of inventory, own real estate
- Decent chance of bounce back after covid (was trading at EUR 18 pre covid) - but bounce back not needed
Why is it not trading at EUR 20 today?
- Severe temporary impact currently and over next 6-12 months, 1) Covid-19, 2) transportation cost / product availability
- Anti-promotional – CEO always very negative on Greece and outlook
- Question mark about capital allocation and governance
o Inefficient balance sheet
o Not independent and diverse board, no true split between Chairman and CEO etc.
- Retail generally disliked due to threat from online
- Question mark about the length of growth runway - Some analysts believe that growth is done after the current expansion to 25 stores in Romania
Risks:
- Macro/Greece issues
o Mitigant – greece was actually doing ok pre pandemic with 1.5-3% GDP growth
- Increased competition from discount retailers over time
- Online threat not over next 3-5 years but maybe 5-10yrs?
o Mitigant: low unit price and basket size
o Most successful western european discount retailers have no online offering. They are still doing great with much higher online penetration
o Many online operators not interested in Greece, Bulgaria or Romania
- Company overearning at 25% EBIT margin? To decrease with increased competition? -
- Governance issues?
o Capital allocation, Key man risk/Succession, merger of related entities in 2016, ex-vice chairman involved in illegal real estate transactions
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Getting out of covid
Store openings leading to EPS increase