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Dino: Sell (Maintained) DNP PW; DNPP.WA | Retail, Poland

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Dino: Sell (Maintained) DNP PW; DNPP.WA | Retail, Poland Tuesday, August 13, 2019 | update Dino: sell (maintained) DNP PW; DNPP.WA | Retail, Poland Overvalued Given Cost Pressures Current Price PLN 135.90 Dino stock has enjoyed substantial gains in 2019, driven most likely Target Price PLN 111.20 by expectations of stronger like-for-like growth in Q2 2019 MCap PLN 14,372m alongside an accelerating inflation rate. While we recognize the potential of the Company's business model, at the current level we Free Float PLN 9,183m consider Dino overvalued given expected future risks. Dino's goal to ADTV (3M) PLN 42.06m improve the EBITDA margin by 0.1-0.2pp in 2019 represents a big challenge amid rising downward pressure on sales margins and Ownership upward pressure on costs, which can be only partly offset by positive like-for-like growth and improved supplier terms. As for the Tomasz Biernacki 51.10% expansion pace, we do not see much room for upside surprises—we already assume that Dino will open about the same number of new Others 48.90% stores in 2019 as its main rival, Biedronka, did during its peak openings year several years ago, and we expect 2020 openings to outpace Biedronka's record. The downside of adding new stores at such a fast rate is increasing upward pressure on labor costs Business Profile stemming from Poland's current low unemployment rate. Dino is a retail chain operator managing 775 stores at the end of 2017 after expanding at an average Furthermore, as it turns out, the value attributed to an average Dino annual rate of 37.8% between 2010 and 2017. By store according to our calculations is higher than the value of an 2020 Dino wants to increase the store count to a average store operated by its main competitor, Jeronimo Martins target 1,200 locations. (JMT), even though the cash-generating capacity of a Dino store forecast in 2019-2023 is about 33% lower. With all this in mind, DNP vs. WIG DNP looks overpriced to us at 20.2x 2019E and 15.8x 2020E EV/ 150 EBITDA. DNP PLN Overrated effects of rising food prices WIG The Polish food price inflation rate accelerated to an annual rate of 5-6% in 130 May and June 2019, driven by a rapid surge in the prices of vegetables and pork. The uneven distribution of price rises works to the disadvantage of grocery retailers by reinforcing substitution effects. The prices of wholesale fresh pork jumped 25% in Q2 2019 relative to the same year-ago period, 110 with negative implications for the profit margins of Dino's subsidiary meat processing plant, Agro Rydzyna. Increasing pay pressures 90 Dino has a large and increasing presence in the wielkopolskie region in Western Poland, an area where the unemployment rate is among the lowest in Poland at 2.8%. This fact, combined with the Polish government's plans to 70 raise the minimum wage in 2020, creates rising pressures on Dino in terms of future labor costs. Feb.19 Aug.18 Aug.19 Nov.18 Overvalued stores May.19 Our calculations show that the market attributes higher market capitalization 9MTP Rating per store to Dino than to Jeronimo Martins in the years 2019 and 2020. Company Meanwhile an average Dino store has weaker cash-generating capacity at new old new old PLN 0.70m than an average JMT store at PLN 1.05m according to our Dino 111.20 112.70 sell sell forecasts for 2019-23. We also draw attention to the much more capital- Current Target Company Downside intensive DNP expansion model, which makes the FCF/store ratio much less Price Price attractive than for Jeronimo Martins. Dino 135.90 111.20 -18.2% Ambitious expansion plans Forecast update 2019E 2020E 2021E We expect Dino to open 244 new stores in 2019, followed by 293 in 2020. Revenue -0.9% +3.7% +9.4% This compares to peak yearly openings of 268 by JMT's Biedronka stores in EBITDA -3.0% +0.0% +6.1% 2013. Given the locations of existing and planned distribution centers, Dino seems to be focusing its expansion plans in Western Poland, exposing itself Net Profit -5.3% -3.7% +2.3% to high labor costs and possible cannibalization effects. (PLN m) 2017 2018 2019E 2020E 2021E Revenue 4,462.8 5,838.5 7,673.7 9,980.2 12,221.0 EBITDA 401.4 541.1 703.9 894.2 1,100.2 EBITDA margin 9.0% 9.3% 9.2% 9.0% 9.0% EBIT 303.2 429.0 549.0 703.1 858.8 Net income 213.6 307.6 388.4 506.4 633.5 P/E 62.4 43.3 34.3 26.3 21.0 P/CE 44.5 31.8 24.5 19.1 15.2 P/BV 14.7 11.0 8.3 6.3 4.9 Analyst: EV/EBITDA 35.5 25.6 20.2 15.8 12.5 DPS 0.0 0.0 0.0 0.0 0.0 Piotr Bogusz +48 22 438 24 08 DYield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected] Forecast Update Dino store expansion, 2011-22P 2400 19.2% We have lowered our FY2019 earnings estimates for Dino 2000 2018-22P CAGR slightly to reflect higher expected costs of financing, and on 220 the other hand we have raised our expectations as to the 1600 240 30.2% rate of future store expansion and revenue growth. 293 1200 2010-18 CAGR Consequently, we have cut our net profit forecasts for 244 800 202 2019 and 2020 by 5.3% and 3.7, respectively. 147 117 400 101 90 86 Changes to 2019-2020 earnings forecasts 43 80 2019E 2020E 0 (PLN m) old new change old new change 2011 2012 2013 2014 2015 2016 2017 2018 2020P 2021P 2022P Revenue 7 741.9 7 673.7 -0.9% 9 622.2 9 980.2 +3.7% 2019P Gross 24.4% 24.5% +0.1 pp 24.4% 24.5% +0.1pp Total stores New stores margin Source: Dino, P – projections by Dom Maklerski mBanku EBITDA 715.3 703.9 -1.6% 884.0 894.2 +1.1% margin 9.2% 9.2% -0.1 pp 9.2% 9.0% -0.2pp Dino's main rival, the Biedronka chain of supermarkets EBIT 561.2 549.0 -2.2% 696.8 703.1 +0.9% owned by the listed Portuguese retailer Jeronomo Martins, Pre-tax 512.6 484.2 -5.6% 657.4 633.0 -3.7% income experienced peak expansion during the 2011-2013 period, Net income 410.1 381.7 -5.3% 525.9 500.3 -3.7% when is increased its store count from 1,649 to 2,393, i.e. Source: Dino, Dom Maklerski mBanku by 248 locations on average per year (culminating at 268 in 2013). The Biedronka stores opened during that time were larger than an average Dino store with a square Store Expansion Accelerates in H2 meterage of ca. 615 vs. ca. 385sqm Dino. 2019 Dino's growth model is to build stores on greenfield sites Dino operated 1,056 stores as of 30 June 2019 after the using the services of just one general contractor (a addition of 81 locations during the first half of the year construction firm called Krot-Invest). Looking at the current versus 74 locations opened in the first half of 2018. With land bank, a growing logistics network, and the partnership 244 total openings expected in 2019, this would imply that with a proven building firm, Dino looks well-prepared to the Retailer has scheduled 67% of this year's target move forward with the planned expansion. During the four openings for the second half of the year, a higher years to 2022, we predict Dino might be opening more percentage than the 64% annual average registered in H2 stores per year than rival Biedronka did at the height 2016-2018. The acceleration marks a departure from of its expansion effort, with 250 average openings the original plan to stagger openings more evenly expected yearly against Biedronka's 248 in 2011- across four quarters. 2013. Based on Biedronka's example, the rate of yearly openings by Dino will probably decline from Dino H1 and FY new store openings and H2 openings 2021. as a pct. of FY openings, 2016-2019E 300 68% Biedronka vs. Dino annual store openings, 2010-20P 66.7% 66.8% 350 250 66% 300 200 64% 250 63.4% 200 150 62% 60.7% 244 150 293 100 202 60% 268 252 244 100 224 202 147 194 117 183 50 58% 50 147 117 81 90 86 21 80 101 55 101 77 74 80 46 49 43 0 56% 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2016 2017 2018 2019 2020P Biedronka Dino 2019P Stores added in H1 (lhs) Source: Dino, Jeronimo Martins, P – projections by Dom Maklerski mBanku Stores added in FY (lhs) Stores added in H2 as a % of FY openings (rhs) Dino's current contract with Krot-Invest runs until 30 Source: Dino, Dom Maklerski mBanku June 2020, and if renewed for another period the construction costs might increase looking at the Aiming for 250 New Stores A Year current trends in prices of building materials and services. in 2019-2022 Assuming Dino opens 244 new stores in 2019, this indicates Geographic Risk an annual rate of expansion of 20%, continuing into 2020 with a further 293 openings. We currently forecast a Pace of expansion 2018-2022 openings CAGR of 19% assuming Dino The 1,056 Dino stores in business as of 30 June 2019 adds 250 new stores on average per year in the years represent a density rate of 2.6 locations per 100,000 2019-2022.
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