Jumbo. Stock price rally fully justified BUY EUROCORP. Price ( ): 7.20 Target ( ): H1:05 Review

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1 EUROCORP Jumbo Reuters: BABr.AT Bloomberg: BABY GA General Retailers Greece BUY Price ( ): 7.20 Target ( ): 8.60 H1:05 Review Market Cap ( m): Net y/e ( m): 78.5 y/e ( ): m Price Range ( ): Avg. Daily Volume: 40,046 Free float (%): 54.2 Relative perf. to ASE General (%): 1 mth: mths: mths: 30.8 Absolute performance (%): 1 mth: mths: mths: Feb 2004 Mar Source: JCF Quant Jumbo vs ASE General (1 year) Apr May Jun Jul Jumbo Aug Sep ASE General Oct Nov Dec 2004 Jan 2005 Feb 2005 Stock price rally fully justified Jumbo delivered another forecast beating set of results. H1:05 group sales jumped 27% y o y to 139.4m, beating our 132.7m estimate, driven by continuous network expansion and strong Christmas sales. At the operating level, economies of scale along with a shift towards low cost/high margin products lifted gross margin by 70bps y o y, a rise that was partially offset by a slim y o y increase in SG&A s over sales. Thus, the EBITDA margin advanced 30bps y o y to 26.6%. On those grounds, EBITDA mounted 28% y o y to 37.1m, surpassing our 33.2m estimate. Upbeat operating performance along with stable y o y depreciation expenses and the absence of minorities (given that Jumbo fully acquired its Cypriot subsidiary) rushed to the bottom line, with EBTAM spiking 40% y o y to 29m, well ahead of our projection. Following, FY04/05 group sales are now seen rising 18% y o y to 222.7m, c1.5% above our prior projection. Moreover, we upped EBITDA and net profits by 3% and 10% respectively compared to previous estimates, to 60.2m and 29.1m respectively, thanks to improving gross margins, lower depreciation charges and a reduced effective tax rate. Hence, we now expect an 18% y o y reported EPS growth. As a result of our earnings upgrade, improved WC management and reduced capex estimates, our typical 3 stage DCF exercise returns a fair value of 8.60 per share, up from 6.20 before, implying an upside of 19% from current trading levels. We view the stock price s recent rally as fully justified and we reiterate our Buy recommendation, owing to the juicy upside still left to our revised TP and favourable peer group comparison. The main risks, we acknowledge, lie on the successful execution of the company s business model and the future heightened competition from the potential entrance of new players. Year EV/ Sales EBITDA EBT EPS * DPS P/E to June EBITDA Yield ( m) ( m) ( m) ( ) ( ) (x) (x) (%) e f f * Before exceptionals and goodwill Dimitris Haralabopoulos d.haralabopoulos@eurocorp.gr 16 th February 2005

2 Profit and loss account f Year to June ( m) e 2006f 2007f Revenues % change EBITDA EBITDA margin (%) Depreciation Goodwill amortisation Associate income Joint venture income Other items EBIT Net interest result Exceptional items Profit before tax Taxation Minorities Reported net profit Net profit adj pre gwill/excptl Tax rate (%) Number of shares (m) EPS reported ( ) EPS adj pre gwill & excptl. ( ) CFPS ( ) Book value per share ( ) Net dividend ( ) Sales by activity H1:05 Books & stationery 10% Seasonal Products 20% Infant products 25% Sales by region H1:05 Cyprus 5% Toys 45% Cash flow statement f Year to June ( m) e 2006f 2007f EBITDA Exceptional items Change in working capital Provisions & other items Operating cash flow Net interest Tax paid Capital expenditure Free cash flow Dividends Acquisitions/disposals Shares issued Others (currency...) Change in net cash Balance sheet summary f Year to June ( m) e 2006f 2007f Fixed assets net L/T investments/participations Goodwill & intangibles Trade debtors (receivables) Inventories Trade creditors (payables) Net cash/(debt) Provisions & other Shareholders' funds Minorities Ordinary shareholders' equity Investment ratios f Year to June e 2006f 2007f P/E pre goodwill & excptl. (x) Reported P/E (x) P/CF (x) P/BV (x) Net yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) ROE (%) ROCE (%) Gearing (%) Pay out (%) Greece 95% Company data Shareholders 54.2% Free float 31.9% Tanosirian S.A 13.9% Mr Vakakis Source for all tables on this page: Company data/ Our system of recommendations reflects expected absolute returns in local currencies on a 6 month time horizon: BUY = expected return above 15% ADD = expected return between 5% and 15% HOLD = expected return between 5% and 5% REDUCE = expected return between 5% and 15% SELL = expected return worse than 15% 2

3 H1:05 interims beat our expectations Group sales jumped 27% y o y, beating our estimates by 5% Jumbo s H1:05 interims beat our and consensus expectations for yet another quarter, driven by the company s continuous store network expansion and strong Christmas sales. Group turnover jumped 27% y o y to 139.4m, beating our 132.7m estimate, backed by not only the addition of 3 new stores (Korinthos, Karditsa and Volos) but also from the unabated strong demand for official Olympic Games products that added some 5m in group H1:05 sales. Group POS at the end of December 2004, amounted to 36, compared to 33 in the respective period last year. Revenues stemming from Greek based activities jumped 28% y o y, on the back of network expansion. On the other hand, Cypriot subsidiary s sales advanced by a more modest 7% y o y as no new stores commenced operations. As regards Q2:05, which is traditionally considered the company s strongest quarter, owing to the Christmas sales period, group revenues advanced 23% y o y to 88.6m, overcoming our 81.8m projection. Gross margin y o y enhancement lifted operating profitability Upbeat operating performance flowed down to the bottom line Impressive cash flow generation, thanks to successful working capital management Despite the 70bps y o y gross margin enhancement, owing to the company s move into low cost/high margin products and economies of scale, the EBITDA margin rose just 30bps y o y to 26.6%, down to rising y o y SG&A s over sales. On those grounds, EBITDA mounted 28% y o y to 37.1m, surpassing our 33.2m estimate. Upbeat operating performance rushed to the bottom line, with EBTAM spiking 40% y o y to 29m, well ahead of our 24.4m projection. Stable y o y depreciation expenses and the absence of any minorities, given that Jumbo fully acquired its Cypriot subsidiary in H1:04, also contributed to the striking bottom line results. It is worth mentioning Jumbo s H1:05 impressive cash flow generation, owing to successful working capital management, due to investments in logistics and capitalization of its strong bargaining power over suppliers. Consequently, Jumbo succeeded in creating a cash pile of 69m, compared to 17.7m in the respective period last year. In addition, H1:05 net debt reduced to 28.4m vs 89.6m at the end of FY03/04. Finally, H1:05 capex amounted to 12.1m, while Q2:05 capex stood at 8.6m, spent for the store rollout programme. Results vs our estimates (in m) 6M:04 6M:05 y-o-y 6M:05e Actual y-o-y Summary P&L Group Actual Actual ch. Our vs Our ch. Sales % % 20.4% EBITDA % % 14.8% EBITDA margin 26.3% 26.6% 25.0% EBT (pre-minorities) % % 15.3% EBT margin 19.2% 20.8% 18.4% (in m) Q2:04 Q2:05 y-o-y Q2:05e Actual y-o-y Summary P&L Group Actual Actual ch. Our vs Our ch. Sales % % 13.6% EBITDA % % 4.5% EBITDA margin 29.1% 29.2% 26.8% EBT (pre-minorities) % % 2.3% EBT margin 23.1% 24.4% 20.8% Source: Jumbo / 3

4 Forecasts Financials Upgraded FY04/05 earnings estimates, courtesy of upbeat H1:05 interims Following Jumbo s forecast beating H1:05 interims, on strong Christmas sales, we revisited our model and precede in an upward adjustment to our earnings estimates, accounting for the continuous network expansion. In line with management guidance, we assume that the company will add six new stores in FY04/05 3 stores have already commenced operations in H1:05 and 3 more (N. Ionia, Alimos and a 2 nd store in Patras) are expected to be added in Q4:05 totalling 39 POS. FY04/05 group turnover is seen advancing 18% y o y, in line with new management guidance FY05/06 group revenues are seen advancing 13% y o y thanks to 4 new stores Robust top line performance flows down to the operating level Reduced depreciation expenses flatter bottom line projections Furthermore and as a result of the company s upbeat H1:05 interims, management was left with no choice other than to revise upwards its initial guidance for a 12% y o y FY04/05 top and bottom line uplift. New management guidance calls for both a 18 20% y o y sales and earnings growth. On our new set of estimates, we expect FY04/05 group turnover to increase 18% y o y to 222.7m, a whisker above our previous estimate of 219.4m. Note that our previous sales growth projection stood at 16%, above former management guidance. With reference to FY05/06, we forecast that Jumbo will add 4 stores, compared to 5 before, though we upped our average selling space per store complying with management guidance. All in all, our FY05/06 group turnover estimate stands at 251.9m, just a touch above our former projections, implying a 13% y o y uplift. From FY06/07 onwards, we expect the company to add on average 3 new POS per annum so that by end 2008 group POS will reach management target of 50. We expect that, from 2008 onwards, heightened competition will take its toll on Jumbo, resulting in a more moderate single digit sales growth. We view the possibility of the entrance of foreign competition as likely, though we believe that new entrants will seek presence through the acquisition of a local retailer and not by setting up their own store network. We expect Jumbo s bargaining power over suppliers and sales mix shift towards low cost/high margin products to benefit operating margins in the near term. Hence, our new FY04/05 and FY05/06 EBITDA margin stand at 27% and 26.5% respectively, 50bps above our prior forecasts. Moreover, FY04/05 and FY05/06 EBITDA lie 3% and 2% above our previous estimates respectively, at 60.2m and 66.8m respectively. In the longer run, we stick to our view that heightened competition will likely exert pressure on margins and forecast a gradual, albeit moderate, EBITDA margin decline from 27% this year to 25% in Moreover, as evident from H1:05 interims, we had obviously overestimated depreciation expenses and on the back of H1:05 interims, we cut our FY04/05 and FY05/06 depreciation charges by 9% and 13% respectively compared to our former estimates. All in, FY04/05 and FY05/06 EBT pre minorities are now estimated at 44.2m and 50.5m respectively. 4

5 A lower effective tax rate prompts for a 18% y o y FY04/05 net profit uplift As regards FY04/05 bottom line estimates, despite the FY03/04 low effective tax rate (30%) we preferred to err on the cautious side regarding this year s tax rate and assume it will revert to 34%. All in, FY04/05 net profit is seen advancing 18% y o y to 29.1m, compared to our former projection of 26.4m. Hence, FY04/05 reported EPS is seen at 0.64, compared to previously estimated Last but not least, we look forward in a c20% y o y FY05/06 net profit uplift to 34.8m, compared to our previous forecast of 31.0m. Summary Forecast Changes (in m) 2004/05e New vs y-o-y 2005/06f New vs y-o-y Summary group P&L 2003/04a New Old Old ch. New Old Old ch. Sales % 18.0% % 13.1% EBITDA % 18.7% % 11.0% EBITDA margin 26.9% 27.0% 26.5% 26.5% 26.1% EBT (pre-minorities) % 26.3% % 14.3% EBT margin 18.5% 19.8% 18.5% 20.0% 18.2% EAT reported % 18.4% % 19.5% Net margin 13.0% 13.1% 12.0% 13.8% 12.4% EPS reported (in ) % 18.4% % 7.8% Source: Jumbo / Reduced FY04/05 and FY05/06 capex assumptions boost free cash flow generation We change our treatment of the company s convertible bond Recent share disposals from major shareholder raise overhang concerns but improve liquidity Management guidance calls for this year s capex to reach 25 27m while long term capex ( ) will likely stand at c 20 21m per annum. Accordingly, we cut our FY04/05 capex projections by 16% and our FY05/06 capex by 30% compared to prior projections, on the back of our altered assumptions for new store openings (4 instead of 5 new stores). FY04/05 and FY05/06 free cash flow generation is seen flattered not only by the aforementioned capex cut but also from reduced inventories estimates, following H1:05 declining inventories. In relation to the company s 11.8m convertible bond, we changed our previous hypothesis, that investors would cash in the bonds at maturity October 11, 2008 instead of exercising the option to convert into shares. On our new set of estimates, we assume that under current trading levels it is beneficial for investors on October 11, 2005 to exercise the option to convert each bond into 1.8 Jumbo shares, as the acquisition cost of 2.37 per share offers a hefty upside to current trading levels. Hence, we adjust the company s FY06 equity capital by 11.8m, relating to the repayment of the bond, while we add to the company s FY06 outstanding shares the 4.98m shares (10.9% of current share capital) that would arise from the aforementioned exercise. The end effect of our new assumptions is a c11% FY06 reported EPS dilution. That is why FY05/06 EPS is seen rising by a modest 8% y o y to 0.69, despite the 20% y o y net income growth, as shown in the table above. Take note that in the period from December 2004 until today, Mr Vakakis, Chairman and CEO, disposed c3.7m shares, lowering his direct stake from the original 19.5% to the current 13.9% holding. The aforementioned disposal came as a result of Mr Vakakis announced intention to sell 4m shares (8.77% of share capital). Despite the fact that the abovesaid sale will likely improve the stock s free float and liquidity, overhang concerns have surfaced. Jumbo will first report under IFRS for the 3 month period ending September 30, Management has not given any guidance regarding the effect of the adoption of new accounting standards. 5

6 Valuation & Recommendation TP raised to 8.60 per share, from 6.20 before, owing to earnings upgrade and cash flow enhancement As a result of our earnings upgrade from 2005 onwards and the reduced capex assumptions, our typical 3 stage DCF exercise returns a fair value of 8.60 per share, up from 6.20 before, implying an upside of 19% from current levels. Future cash flows are discounted using a WACC of 8.7% while we have assumed a 1% perpetuity growth rate. Take note that our new TP has been calculated based on the new shares stemming from the exercisable convertible bond. DCF derived target price calculation (in m) WACC 8.7% Sum of NPVs of FCFs (10-yr) Risk free rate 5.0% Plus: NPV of Terminal Value Equity Risk Premium 4.0% Market value of Associates 2.8 Company beta (geared) 1.3 Less: Net Debt/(Cash) at June Cost of geared equity 9.7% Market value of Minorities 0.0 Perpetuity rate 1.0% Implied Value of Equity Implied Value per Share 8.6 Premium/(Discount) 19.4% Source: Jumbo trades attractively when compared to foreign peers Furthermore, peer group comparisons indicate that the company trades at a sizeable discount on almost all valuation metrics. We acknowledge, however, that direct comparison to Toys R Us is not really meaningful due to differences in size and market dynamics. Nevertheless, we have included in our peer group a broader portfolio of both retailers and toy manufacturers, which also depicts Jumbo s valuation as fairly attractive. At our revised TP, the company would still trade fairly attractive, exhibiting a P/E 05e of 13.5x and an EV/EBITDA 05e ratio of 8.5x. Peer group comparisons 15/2/2005 Mkt Cap P/E (x) EV/EBITDA (x) P/BV (x) Dividend Yield EPS CAGR EBITDA ROE Company Country (in m) 2004e 2005f 2004e 2005f 2004e 2005f 2004e 2005f '03 - '05 margin 04e 04f Hasbro US 3, % 1.2% 15.6% 15.8% 11.5% Mattel US 8, % 2.2% 3.4% 16.5% 21.0% Toys R' Us US 3, % 0.0% 14.9% 6.6% 4.2% Game Group UK % 3.3% 0.4% 7.6% 14.8% WH Smith UK % 3.4% -0.2% 4.2% 17.2% General Retailers Europe 125, % 3.0% 13.1% 13.8% 21.0% Simple Average % 2.2% 7.9% 10.7% 15.0% Jumbo (at current price) Greece % 3.1% 31.3% 27.0% 33.9% Premium/(Discount) -41% -37% 0% -2% 22% -5% 0.8pp 0.9pp 23.4pp 16.3pp 18.9pp Jumbo (at target price) Greece % 2.6% Premium/(Discount) -29% -24% 26% 18% 46% 14% 0.3pp 0.4pp Source: /JCF Quant Remains a Buy All in, we believe the stock s 16% y t d outperformance against the ASE General Index is justified by the forecast beating interims. We reiterate our Buy recommendation, on the back of the hefty upside still left to our revised TP and favourable peer group comparison. The main risks, in our view, that could impede the shares from achieving our TP lie on the successful execution of the company s business model and the likely increase in competition in the long run, not only from local toy retailers but also from mass merchants that provide similar products at a deep discount in order to increase store traffic and potential new entrants, ultimately exerting pressures on the company s operating profitability. 6

7 EUROCORP SA, 14 Filikis Eterias Sq., Athens , Greece, Tel: Fax: E mail: eurocorp.research@eurocorp.gr Member of the Calyon Group, Corporate & Investment Bank Research & Analysis George Grigoriou george.grigoriou@eurocorp.gr Yannis Karyotis yannis.karyotis@eurocorp.gr Dimitris Haralabopoulos d.haralabopoulos@eurocorp.gr Institutional Sales & Trading Derivatives Dimitris Laliotis dimitris.laliotis@eurocorp.gr Sophia Margariti sophia.margariti@eurocorp.gr Spyros Valatas spyros.valatas@eurocorp.gr Christos Dionisopoulos chris.dionisopoulos@eurocorp.gr Spyros Gryllis derivatives@eurocorp.gr Paulina Reggou paulina.regou@eurocorp.gr This document is for informative purposes only and it may not be reproduced or further distributed, in whole or in part, for any purpose without authorization. SA has based this document on information obtained from sources it believes to be reliable but which it has not independently verified and, thus, makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. This document is not and should not be construed as an offer (or part of an offer) to sell or the solicitation of an offer to purchase or subscribe for any securities, while expressions of opinion are subject to change without notice. SA and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). The firm and its affiliates may have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments) and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. Report SA, All rights reserved. 7