Ceconomy AG Germany | Retail | MCap EUR 1,484.4m 2 July 2021 Initiation Preparing for the BUY (BUY) Target price EUR 6.00 (none) Current price EUR 4.13 turnaround; Initiating with Up/downside 45.3% BUY What’s it all about? Being the leading consumer electronics retailer in Europe, Ceconomy’s stationary business has suffered from fierce competition in the past years, amplified by pandemic- related store closures in 2020/21. But the COVID-19 pandemic helped to boost online sales and market share. Whereas internal issues have prevented the company to adapt adequately to market conditions, a settlement with the MediaMarkt founder family has been found, paving the way for long due reorganization and transformation of the company and its business model. A well-implemented omnichannel concept can lead to sustainable sales and earnings growth. Against this backdrop, we believe that MAIN AUTHOR Ceconomy shares are undervalued. The massive discount relative to industry peers and Alexander Zienkowicz its stand alone valuation should decrease with positive news flow. We initiate [email protected] Ceconomy with a price target of EUR 6.00 and a BUY rating. +49 40 309 293-56 IMPORTANT. Please refer to the last page of this report for “Important disclosures” alsterresearch.com and analyst(s) certifications. This research is the product of AlsterResearch, which is authorized and regulated by the BaFin in Germany. AlsterResearch Page 2 of 22 Ceconomy AG Germany | Retail | MCap EUR 1,484.4m | EV EUR 2,783.4m MAIN AUTHOR BUY (NOT RATED) Target price EUR 6.00 (none) Current price EUR 4.13 Alexander Zienkowicz Up/downside 45.3% [email protected] +49 40 309 293-56 Preparing for the turnaround; Initiating with BUY E-Commerce gaining traction In the recent years, the leading consumer electronics retailer in Europe Ceconomy (brands: MediaMarkt, Saturn) faced external and internal turbulences. A secular shift towards online shopping negatively affected sales in the traditional bricks and mortar-business. In addition, inadequate efforts in e-commerce allowed competition to capture market share. However, while impacting the offline business the COVID-19 pandemic helped to boost online sales significantly. In the recent Q2, Ceconomy reported a share of online sales of almost 50%, which corresponds to sales growth of nearly 150% yoy. Source: Company data, AlsterResearch Settling long-term issues Disagreements with the MediaMarkt founder family and the High/low 52 weeks 6.02 / 3.01 lack of continuity on a management level hampered the strategic development in the Price/Book Ratio 3.0x recent years. However, the company found a way to settle the protracted dispute. Ceconomy is assuming full control of MediaMarktSaturn, in return the founders family Ticker / Symbols will be compensated with cash and new shares (transaction value: EUR 815m). The ISIN DE0006632003 transaction is to be closed by end of FY20/21. The settlement paves the way for WKN 663200 continuity in management as duplicate structures (Ceconomy /MediaMarktSaturn) Bloomberg CEC:GR can now be eliminated. Changes in estimates Against this background, Dr. Karsten Wildberger, currently COO at E.ON SE, will take Sales EBIT EPS over as CEO of Ceconomy, replacing interim CEO Düttmann from August 1st. Already 2021 old 00.0 00.0 00.0 ∆ – – – in May, Florian Wieser stepped up as CFO, being in that role at MediaMarktSaturn 2022 old 00.0 00.0 00.0 since 2018. ∆ – – – 2023 old 00.0 00.0 00.0 Transformation under way Streamlining management structures is one part of the ∆ – – – company’s transformation plan. From this, the group expects sustainable savings of just over EUR 100m p.a., the majority of which are to take effect from FY22/23 Key share data onwards. Number of shares: (in m pcs) 359.42 Book value per share: (in EUR) 1.35 – continued – Ø trading volume: (12 months) 620,000 Ceconomy AG 2018 2019 2020 2021E 2022E 2023E Major shareholders Sales 21,418.0 21,455.0 20,831.0 21,101.8 21,650.4 22,083.5 Haniel 22.5% Growth yoy -0.9% 0.2% -2.9% 1.3% 2.6% 2.0% Meridian Foundation 14.2% EBITDA 604.0 496.0 670.0 750.4 934.0 1,079.2 Freenet 9.1% EBIT 419.0 224.0 -80.0 274.3 389.7 485.8 Free Float 42.5% Net profit -212.0 122.0 -232.0 159.4 247.7 325.5 Net debt (net cash) -1,249.0 -947.0 786.0 847.3 617.1 266.2 Company description Net debt/EBITDA -2.1x -1.9x 1.2x 1.1x 0.7x 0.2x Ceconomy AG is a Germany-based EPS recurring -0.64 0.34 -0.65 0.44 0.51 0.67 company engaged in consumer DPS 0.00 0.00 0.00 0.04 0.13 0.20 electronics retail under the MediaMarkt Dividend yield 0.0% 0.0% 0.0% 0.9% 2.7% 4.3% and Saturn brand names. Its subsidiary Gross profit margin 20.1% 19.3% 18.1% 17.5% 17.9% 17.9% Deutsche Technikberatung provides EBITDA margin 2.8% 2.3% 3.2% 3.6% 4.3% 4.9% EBIT margin 2.0% 1.0% -0.4% 1.3% 1.8% 2.2% professional assistance with installing, ROCE 23.3% 12.6% -2.3% 7.1% 8.6% 13.5% connecting and troubleshooting electronic devices. EV/EBITDA 1.3x 2.2x 4.2x 3.8x 2.8x 2.1x EV/EBIT 1.9x 5.0x -34.8x 10.4x 6.8x 4.7x PER -6.5x 12.2x -6.4x 9.3x 8.1x 6.2x FCF yield 49.6% 3.4% 79.6% 7.6% 9.9% 18.2% Source: Company data, AlsterResearch AlsterResearch Page 3 of 22 To strengthen competitiveness, the company also intends a broad repositioning of its brands, a centralized and reduced category management. Further, new store formats and a ramp up in logistics will be part of an enhanced omnichannel concept. More financial flexibility The company recently issued a EUR 500m 5-year senior unsecured bond, thereby further enhancing its financing structure. The notes will mature in June 2026 and carry an annual fixed coupon of 1.75%. Already in May, Ceconomy signed a new ESG-linked syndicated revolving credit facilities of EUR 1.06bn, which are intended to replace the existing syndicated revolving credit facilities with the participation of KfW as a back-up line. Conclusion Ceconomy took quite some time to make important steps towards a turnaround. After being a laggard in e-commerce, the pandemic surely helped to boost online sales and gain market share. Building on that, the company’s primary focus is to implement a sustainable omnichannel concept by reallocating resources and reshaping its stationary business. Settling long-term issues and a strengthened financing will support the transformation process. In terms of valuation, our DCF model indicates a massive upside (EUR 10.00 DCF). However, relative to industry peers, Ceconomy is trading at a high discount (EV/Sales FY23E 0.1x vs peers 0.4x, EV/EBIT FY23E 4.7x vs 9.8x) due to its early stage in transformation and the late start of its e-commerce business. Due to a lack of visibility, we are valuing Ceconomy AG on the basis of adj. FCF yield 2021E, which derive at a price target of EUR 6.00. It is thus slightly more conservative than our DCF based fair value calculation. We initiate Ceconomy with a BUY recommendation. AlsterResearch Page 4 of 22 Table of content Table of content 4 Investment case in six charts 5 Company background 7 SWOT-Analysis 10 Valuation 11 Financials in six charts 15 Financials 16 Conflict of interests 20 Important disclosures 21 Contacts 22 AlsterResearch Page 5 of 22 Investment case in six charts Portfolio Revenue by segments operating business Investments Others Eastern Europe 2% 8% Western and DACH South Europe 59% 31% Post-pandemic ambitions MediaSaturn transaction settles long-term issues Resizing store formats Implementing new strategy Source: Company data; AlsterResearch AlsterResearch Page 6 of 22 P&L data Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Sales 4,600.0 4,996.0 6,821.0 4,631.0 4,107.0 4,372.0 7,464.0 4,322.0 yoy growth in % 0.0% 1.5% 0.9% -7.7% -10.7% -12.5% 9.4% -6.7% Gross profit 854.0 1,048.0 1,248.0 800.0 654.0 1,078.0 1,266.0 646.0 Gross margin in % 18.6% 21.0% 18.3% 17.3% 15.9% 24.7% 17.0% 14.9% EBITDA -87.0 69.0 549.0 105.0 137.0 175.0 521.0 82.0 EBITDA margin in % -1.9% 1.4% 8.0% 2.3% 3.3% 4.0% 7.0% 1.9% EBIT -207.0 52.0 349.0 -371.0 -82.0 -17.0 334.0 20.0 EBIT margin in % -4.5% 1.0% 5.1% -8.0% -2.0% -0.4% 4.5% 0.5% EBT -113.0 80.0 327.0 -391.0 -77.0 16.0 330.0 2.0 taxes paid -51.0 27.0 105.0 -82.0 54.0 16.0 126.0 -64.0 tax rate in % 45.1% 33.8% 32.1% 21.0% -70.1% 100.0% 38.2% -3,200.0% net profit -50.0 38.0 170.0 -292.0 -105.0 -5.0 153.0 104.0 yoy growth in % na% na% 58.9% na% na% na% -10.0% na% EPS -0.14 0.10 0.47 -0.81 -0.29 -0.01 0.43 0.29 Source: Company data; AlsterResearch AlsterResearch Page 7 of 22 Company background Products & Services: CECONOMY is a leading consumer electronics (CE) retailer in Europe.