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2.2. DCF Valuation of EUR9

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2.2. DCF Valuation of EUR9 INDEPENDENT RESEARCH DIA 12th March 2015 Olé! Food retailing Fair Value EUR8.5 (price EUR6.79) BUY Coverage initiated Bloomberg DIA.SM Dia has an excellent business model (discount is not only a format for Reuters DIA MC mature countries but also a means of conquering international 12-month High / Low (EUR) 7.1 / 4.6 business) while circumstances are beneficial (tax credits and recovery Market capitalisation (EURm) 4,419 Enterprise Value (BG estimates EURm) 5,002 in Spanish economy). As such, in view of the group's attractive Avg. 6m daily volume ('000 shares) 5,250 valuation (2016 PER of 13.3x vs 16.1x for the sector, i.e. a PEG of 0.9x), Free Float 90.0% we are initiating coverage of the stock with a Buy recommendation 3y EPS CAGR 14.7% Gearing (12/14) 141% and FV of EUR8.5. Dividend yields (12/15e) 2.48% Never call me France again! The value creation premium (i.e. the YE December 12/14 12/15e 12/16e 12/17e implied share valuation as in EV/IC = ROCE/WACC, relative to the Revenue (EURm) 8,011 9,630 10,375 11,198 current price) stands at 14% today whereas it averaged at 35% over Curr Op Inc. EURm) 400.7 402.6 458.6 536.6 2012/14! Despite the considerable improvement in the group's profile Basic EPS (EUR) 0.51 0.40 0.57 0.63 Diluted EPS (EUR) 0.41 0.41 0.51 0.62 prompted by the disposal of French activities, the market is therefore EV/Sales 0.62x 0.52x 0.47x 0.42x placing an increasingly low price on value creation potential. Realignment EV/EBITDA 8.5x 8.0x 7.0x 6.0x with the historical average would imply a valuation of EUR7.8. EV/EBIT 15.3x 15.5x 11.9x 9.6x Dia boasts a good format..: the retailer's healthy operating P/E 16.6x 16.5x 13.3x 11.0x performances (+103bp market share in Spain between 2009 and 2014) ROCE 32.2 32.3 33.2 35.6 stem especially from the fact that the soft discount model is particularly suitable to Spain’s economic conditions and prospects. The model is not 7.8 only a defensive format in a crisis period, but also a winning vehicle for 7.3 those aiming to rapidly dominate in emerging markets (Brazil and 6.8 Argentina in particular). 6.3 … and beneficial circumstances: 1/ following the disposal of activities 5.8 in France, Dia has significant tax assets (EUR185m in tax credits due to a 5.3 capital loss) and can reallocate capex notably in favour of emerging markets; the group is an ideal vehicle for playing a recovery in the 4.8 2/ Spanish economy (85% of EBITDA) especially since it is 3/ in a strong 4.3 10/09/13 10/12/13 10/03/14 10/06/14 10/09/14 10/12/14 10/03/15 position to consolidate the Spanish market (the Schlecker operation DISTRIBUIDORA INTNAC.DE ALIMENTACION SXX EUROPE 600 RETAIL proved that it is comfortable with the subject). Franchises, a key asset in preserving margins in the Iberian market: by 2017, 1/ the gradual disappearance of the operating deleverage effect (from -30bps in 2015 to +20bps in 2017) thanks to a progressive return to positive LFL sales growth, and 2/ the evolution of the format mix in favour of the franchise (+35bps) should offset the dilutive impact generated by the acquisition of the El Arbol and Eroski stores (-41bps). DIA should thus be able to nearly stabilise its EBITDA margin by 2017 (9.4% vs. 9.6% in 2014). Analyst: Sector Analyst Team: Antoine Parison Loïc Morvan 33(0) 1 70 36 57 03 Cédric Rossi [email protected] Virginie Roumage r r DIA Simplified Profit & Loss Account (EURm) 2012 2013 2014 2015e 2016e 2017e Revenues 10,125 9,844 8,011 9,630 10,375 11,198 Change (%) 3.5% -2.8% -18.6% 20.2% 7.7% 7.9% Adjusted EBITDA 610 642 585 623 691 783 Adjusted operating income 331 375 401 403 459 537 Exceptionals (42.9) (49.1) (76.8) (80.0) (50.0) (50.0) EBIT 288 326 324 323 409 487 Change (%) 35.3% 13.2% -0.5% -0.4% 26.7% 19.1% Financial results (33.0) (39.8) (40.7) (35.0) (26.5) (14.7) PBT 255 286 283 288 382 472 Tax (102) (95.5) (74.6) (34.5) (32.2) (83.8) Profits from associates 1.1 0.60 0.0 0.0 0.0 0.0 Income from discontinued activities (7.5) 5.1 121 0.0 0.0 0.0 Minority interests 11.5 13.3 0.0 0.0 0.0 0.0 Net profit / group share 158 209 329 253 350 388 Restated net profit 195 238 262 259 314 380 Change (%) 29.7% 22.0% 10.0% -1.2% 21.3% 20.8% Cash Flow Statement (EURm) Operating cash flows 378 397 532 553 632 684 Capex, net (331) (362) (342) (400) (413) (426) Change in working capital (15.1) (19.6) (137) 181 83.3 92.0 FCF 31.6 15.6 53.3 334 303 351 Financial investments (10.2) (56.0) (254) 0.0 0.0 0.0 Dividends (72.5) (83.9) (103) (104) (107) (110) Capital increase (24.0) (45.7) (37.2) (200) 0.0 0.0 Assets disposal 4.1 81.9 600 0.0 0.0 0.0 Other 17.6 66.4 (142) (80.0) (50.0) (50.0) Increase in net debt (53.5) (21.7) 118 (50.0) 146 191 Net debt 629 651 533 583 438 247 Balance Sheet (EURm) Company description Tangible fixed assets 1,619 1,602 1,270 1,450 1,631 1,810 Intangibles assets 461 500 497 497 497 497 DIA is one of the world’s leading Cash & equivalents 364 268 199 149 295 485 specialist discount food retailers. It Other assets 960 1,001 1,160 1,322 1,396 1,478 operates in five countries: Spain & Total assets 3,405 3,371 3,127 3,418 3,818 4,270 Portugal (85% of the EBITDA), Shareholders' funds 148 184 378 326 569 847 Brazil, Argentina and China. Apart L & ST Debt 980 913 732 732 732 732 Provisions 101 72.6 86.1 86.1 86.1 86.1 from the discount model, the Others liabilities 2,177 2,200 1,931 2,273 2,430 2,604 comparative edge of Dia has to to Total Liabilities 3,405 3,370 3,127 3,418 3,818 4,270 with the deployment of its franchise WCR (1,052) (1,032) (895) (1,076) (1,160) (1,252) concept that is low capital intensive Capital employed 1,028 1,069 872 871 968 1,055 and structurally more profitable than Ratios the integrated business. Franchised Operating margin 3.26 3.81 5.00 4.18 4.42 4.79 Tax rate 39.98 33.42 26.34 11.98 8.42 17.76 stores represented 45% of the Normative tax rate 30.00 30.00 30.00 30.00 30.00 30.00 portfolio at end 2014 (vs 27% in Net margin 1.93 2.42 3.28 2.69 3.03 3.39 2009); they should represent 60% of it ROCE (after tax) 22.50 24.53 32.16 32.35 33.16 35.59 by the end of 2017. Gearing 426 353 141 179 76.89 29.17 Net debt / EBITDA 1.03 1.01 0.91 0.94 0.63 0.32 Pay out ratio 54.27 49.39 31.27 41.83 31.11 29.45 Number of shares, diluted 659 646 643 630 617 617 Data per Share (EUR) EPS 0.24 0.32 0.51 0.40 0.57 0.63 Restated EPS 0.30 0.37 0.41 0.41 0.51 0.62 % change 31.0% 24.5% 10.5% 0.8% 23.9% 20.8% Operating cash flows 0.57 0.61 0.83 0.88 1.02 1.11 FCF 0.05 0.02 0.08 0.53 0.49 0.57 Net dividend 0.13 0.16 0.16 0.17 0.18 0.19 Source: Company Data; Bryan, Garnier & Co ests. 2 DIA Table of contents 1. Investment Case ...........................................................................................................................................4 2. Dia is a Buy opportunity in view of upside potential of 23% ............................................................. 5 2.1. An unmerited narrowing in the value creation premium ............................................................ 5 2.2. DCF valuation of EUR9 ...................................................................................................................5 2.3. A good price/quality ratio (2016 PEG of 0.9x) ............................................................................ 7 3. Dia has an attractive format… ..................................................................................................................8 3.1. The discount format is a mature markets format that Dia masters perfectly .......................... 8 3.2. The discount format is also a growth lever for emerging markets ............................................ 9 3.3. 2014/17 CAGR in sales of 11.8%e, primarily driven by emerging markets ......................... 10 4. … and beneficial circumstances ............................................................................................................. 11 4.1. Reallocation of capex and activation of tax-loss carry-forward .............................................. 11 4.2. Dia is a good vehicle for obtaining exposure to the recovery in Spain ................................. 12 4.3. Dia is in a strong position to consolidate the Spanish market ................................................ 14 5. Operating margin should also hold up thanks to franchises ............................................................ 16 5.1. By 2017, franchises could account for 60% of the network (vs 54% in 2014) .................... 16 5.2. The switch to franchise enables a 300-400bp improvement in the margin .........................
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