EM Europe food retailers continue to see favourable tailwinds from COVID-19-driven changes in consumer behaviour, but the intensity is reducing each month. The key trends in Q3 were similar to Q2. Store traffic has recovered (but not to pre-COVID-19 levels) although basket size remains high, driven by continued tailwinds from the shift in HoReCa to home consumption. We see normalisation across Turkey’s food retailers, which is partly supported by weaker seasonal tourism as well as back-to-school trends during Q3. Comparatively, Russian organised food retailers were better placed in Q3, driven by stronger consumer traction towards the proximity format, the full impact of the easing of restrictions during Q3 and a low base effect. In Poland, we expect Dino to report a double-digit LFL growth rate thanks to larger number of maturing stores.
We think it’s more imperative now to focus on the growth outlook for the next year. There is the second wave of COVID-19 impact to consider in the short term (ie going into Q4), however, we think both retailers and consumers are now well acquainted with this environment. We think retailers’ focus will shift to the structural growth drivers, with space expansion, acquisitions and expanding their online domain the key factors to watch. Expected challenges include a high base impact in 2020, the weak economic environment and pressure on disposable income levels (once other avenues of spending pick up the pace).
Although the Q3 results are not a major driver, we like Migros’ (Buy, TP to TRY50 from TRY48) investment theme due to strong valuation re-rating potential. We are Buy on X5 Retail (TP USD44.0) for its strong, stable cash flow generation outlook, and Magnit (TP USD17.50) for potential gains in EBITDA margin from restructuring. We are also Buy on BIM (TP TRY80.0) due to its strategic growth towards higher SKU management, and Sok (TP TRY15.0) as its operations are moving towards a sustained level of higher EBITDA generation. We remain Hold on Dino (TP to PLN240 from PLN235) but we expect strong Q3 results.
For our DCF-based target price of TRY80.00, we assume a WACC of 16.9%, derived from a risk-free rate of 13.0%, in line with market rates; an equity risk premium of 5.5%; a beta of 0.70; and a terminal growth rate of 7.5% (all unchanged). Our target price implies 15.5% upside and a 2021e implied PE (ex- IFRS 16) of 21.2x. We have a Buy rating on BIM as we think the company stands to benefit more from the macroeconomic downturn and the trading-down environment, has a strong net cash position, zero FX exposure and has a stronger dividend outlook for next year.
Downside risks include lower-than-forecast expansion of FILE stores, which could lead to lower sales and margin growth rates; store traffic pressure; lower-than-expected like-for like sales growth for BIM stores; and higher-than expected cost pressures.
Our DCF-based target price of TRY50.00, up from TRY48.0, assumes a WACC of 15.2%, derived from a risk-free rate of 13.0%, in line with market rates, an equity risk premium of 5.5%, a beta of 0.95 and a terminal growth rate of 7.0% (all unchanged). The increase in our target price is due to positive changes in our medium and long-term EBITDA estimates as stated above. Our target price implies c21% upside from current levels and a 2021e implied clean PE (ex-IFRS16) of 18.3x. We have a Buy rating on Migros. We take a positive view of the deleveraging of EUR-based debts (implying re-rating of multiples) and Migros’ capabilities to capture higher market share via online service expansion.
Downside risks include lower-than-expected domestic growth rate; failure to compete effectively with discounters and/or manage cost pressures; and greater-than-excepted dilution of margins from online operations.
For our DCF-based target price of TRY15.00, we assume a WACC of 17.6%, based on a risk-free rate of 13.0%, in line with market rates; an equity risk premium of 5.5%; a beta of 1.0; and a terminal growth rate of 7.5% (all unchanged). We make very small changes to our estimates which have no material impact on our target price, which is unchanged.
Our target price implies upside of 22.9% and a 2021e implied and comparable EV/EBITDA (ex- IFRS 16) of 9.2x. We have a Buy rating on Sok as we believe its operations are improving with higher EBITDA generation, leading to better cash flow and strong FCF yields. Sok is also a net cash company with no FX debt at all.
Downside risks include a continued period of a weaker macro environment; failure to drive store expansion and operating leverage; smaller increase in basket size; and an increase in competition in the market.
Excerpt from HSBC Global Research Report
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