ALPHA FINANCE- Jumbo: Cash shield against coronavirus


Cash shield against coronavirus
We lower Jumbo’s target price to €19.6/share (+39% total upside) from €25.4 previously, mainly on valuation grounds. We increase our WACC assumption to 8.6% from 6.5% previously, in order to account for the increase in the 10-year bond yields in the countries that Jumbo operates in (mainly due to the COVID-19 pandemic). Note that the majority of Jumbo’s physical store network was closed for c2 months, due to the coronavirus spread, thus we revisit our 2020 estimates. That said, we reiterate our ‘Buy’ rating on Jumbo, mainly based on its solid fundamentals that lead to considerable net cash position, while we believe that sales can rebound quickly on the back of the company’s store rollout plan.
Strong FY’19 results 
Jumbo recently released a strong set of FY’19 results (financial year that started on July 1, 2019 and completed on December 31, 2019), with net cash standing at €331mn. EBITDA settled at €161mn, up 15% yoy, mirroring top-line growth, while net profit reached €113mn, up 15% yoy. Gross margin rose by 30bps, standing at 51.1%, while EBITDA margin increased by c200bps, despite the strengthening of the USD against the EUR. Note that Jumbo had pre-announced the sales figure, which came in 7.5% higher yoy at €513mn. 

COVID-19 impact 
According to the management, Easter season traditionally accounts for 12% of annual sales, while each month of the lockdown (except for September and December) accounts for c5% of total. Additionally, the company expects a hit in consumption in most of 2020 due to the pandemic (EC’s latest forecasts call for 9.7% GDP contraction). As a result, there could be delays regarding the opening of stores in 2020, but the group will not deviate from its long-term network expansion strategy. On the other hand, the management clarified that the rent on their leased stores (c40% of total network) is defined as a percentage of turnover, implying no rent paid during lockdown. Finally, the dividend policy remains unchanged, but the management warned that 2020 should be considered a lost year. 

Forecasts Highlights
Following management’s comments, we now expect revenues to decline by 20% yoy. In particular, we account for the closed stores in Greece and Cyprus and the restriction measures in Romania and Bulgaria (revenues down 55% yoy in Apr-May), as well as for the expected GDP decline. Additionally, we assume a more adverse EUR/USD rate, which impacts our gross margin assumption. As a result, we estimate EBITDA to drop by 27% yoy and net income is seen down 36% yoy. In 2021, we project sales to rebound at a large extent (up 29% yoy), on the back of both GDP growth and store rollout, while we upgrade our previous EBITDA margin assumptions due to IFRS 16 impact. Overall, we forecast 2020-24 sales, EBITDA and net income CAGR of 10%, 13% and 16% respectively. 

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