Uchumi Supermarkets Limited Valuation 11 th December, 2015

Transcription

1 Uchumi Supermarkets Limited Valuation 11 th December, 2015

2 Uchumi Supermarkets Limited Valuation Summary We recommend an BUY with a target price of Kshs 9.7 We recommend a BUY on Uchumi, with a target price of Kshs 9.7, a 20.2% upside from its current price of Kshs 8.1. Our recommendation is based on: Turnaround strategy: Uchumi has embarked on a turnaround strategy to restructure and reposition the company to take advantage of the changing market dynamics. The 3-point strategy involves (i) Stabilization, (ii) Optimization, and (iii) Growth Recommendation ACCUMULATE All values in Kshs unless stated otherwise Target Price 9.7 Current Price 8.1 Upside 20.2% DPS - Total Return 20.2% 52 week range Cost of Equity 20.1% Weighted average cost of capital 18.0% Issued Shares (Mns) Investment property potential: We adjust our model to take into account the value of investment properties held by Uchumi. We note that, sale of the land will inject extra cash flows into our model Change in Top Management. Uchumi board of directors retired the CEO and CFO for gross misconduct in June CEO position has been filled and we expect the new office to drive the turn around strategy year share price performance 2

3 Uchumi Supermarkets Limited Full Year Review The one-off non- recurring expenditure from provision and write-offs suppressed earnings Uchumi Supermarkets reported Full Year 2015 results The retailer posted a Kshs 3.4 bn loss after tax compared to a loss after tax of Kshs 364 mn in 2014, on account of declined revenues and increased operating expenses. Operating income declined 24% to Kshs 2.6 bn from Kshs 3.4 bn posted the previous year, on account of a 10% and 23% drop in turnover and other incomes, respectively Operating expenses increased by 33% to Kshs 4.8 bn from Kshs 3.6 bn on account of a one-off Kshs 1.6 bn provision for impairment of the recently closed subsidiaries in Tanzania and Uganda. Loss before tax stood at Kshs 3.5 bn driven by a one-off Kshs 1.0 billion write-off on items related to management misrepresentation When we normalize the earnings, taking into account the two non-recurrent items, core loss after tax would be Kshs 772 mn, compared to profit after tax of Kshs 364 mn in 2014, against our projection of Kshs 335 mn after tax loss *Figures in Kshs Millions Income Statement 2014A 2015A y/y Change 2015E Normalised 2015A Variance from Normalised Sales 14, , % 12, , % Cost of sales 11, , % 10, , % Gross profit 2, , % 2, , % Other incomes % 1, % Total operating income 3, , % 3, , % Total operating expenses 3, , % 2, , % EBITDA (222.6) (2,228.2) 901.1% (628.2) % PBT (3,513.1) % (335.0) (864.0) -61.2% PAT (3,421.4) % (335.0) (772.3) -56.6% 3

4 Uchumi Supermarkets Limited Full Year Review cont The ongoing strategy is hinged on success of three key pillars We note that Uchumi has laggard behind the other retail players in the market, mostly from internal challenges. A number of issues are outstanding, albeit being addressed a) Corporate governance: Uchumi board expressed concerns on the management conflict of interest in the running of the retailer, consequently firing the top management and making new appointments. Corporate governance remains a key factor to consider for both public and private companies as it reflects the overall decision chain for the companies. We expect the new management to drive the three point strategy and return the retailer to profitability space. The recent board changes, that have seen the Chairperson and two other directors step down, and subsequent appointment of new Chairperson is expected to bring in new purpose and change b) Market Niche: In the past, Uchumi has operated in an undefined market space, serving across all market levels. This has put it at a competitive disadvantage against its peers who have specialized in specific market niche. However, for the first time, Uchumi has defined its market niche, the mass market. Whereas the mass market space is very competitive, we note that this will help Uchumi to specialize and focus on one market and deliver best of service c) Capitalization: The retailer has embarked on sell of its non-operating assets on Langata, Ngong and Thika road. The sale expected to injected in sufficient capital that will be used to pay-off suppliers and improve the retailer s working capital. Ability to pay suppliers is key and fundamental in retail business as they represent the mantle of the business chain, an area where Uchumi has struggled for long 4

5 Kenya s Retail Sector Overview Kenya s retail sector is on a fast-paced growth lane driven by changes in consumer trends. The retail sector is one of the fastest growing sectors of the economy in Eastern Africa. The wholesale and retail sector has over the last 4 years grown by a CAGR of 7.7% faster than the overall GDP which has grown by 5.4%, indicating a much more vibrant sector The Kenyan Retail chain market is made of 5 key players namely; Uchumi, Nakumatt, Tuskys and Naivas Supermarkets. The players have all embarked on expansion strategy driven by the need to capture the fast growing Kenyan consumer space The market has remained attractive to global players, with the recent entry of GAME Stores, Carrefour and Choppies, among other major stores which have shown interest in entering the Kenyan market Per Capita income is expected to increase driven by growth in disposable income and consequently a growth in average food basket. Changing consumer taste will drive the retail market for a going forward However, challenges remain rife in the Kenyan retail market. High foods costs driven by high energy related production costs, poor infrastructural networks continue to hamper affordability of food and non food essential items. This has a negative effect on the purchasing power of local consumers 5

6 Intrinsic Valuation- Discounted Cash Flows We obtain an intrinsic valuation of Kshs. 9.6 per share, representing a 19.5% upside Projections Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Terminal Ass. Revenue 12, , , , , ,309.0 EBITDA EBIT After Tax Operating Income Full year free cashflow Discounting factor Terminal value 2,493.3 Present value of cashflows ,304.5 PV of cash flows 2,396.8 Valuation Assumptions Add cash Risk Free Rate 12.0% Value of Land 1,430.0 Risk Premium 6.0% Beta (regressed with NASI) 0.76 Less debt (1,082.8) Cost of Equity 20.1% PV of equity 3,511.9 Terminal Growth Rate 5.0% Outstanding shares Mature Company Beta 100.0% Intrinsic value 9.6 Weighted average cost of capital 18.0% Current price 8.1 Termimal WACC 16.5% Upside/(Downside) 19.5% *Target Debt/Equity ratio of 30% 6

7 Relative Valuation Uchumi trades at much lower multiples compared to the peers EV/EBITDA P/E Company e e Uchumi 5.5x 7.4x 7.6x 5.5x -1.7x 8.8x 7.8x 15.4x 14.7x 8.5x -0.9x 35.5x Labell Vie 14.7x 14.7x 17.8x 15.1x 10.5x 9.4x 72.1x 28.4x 64.8x 41.2x 33.9x 24.1x Choppies Enterprises 0.0x 8.5x 12.5x 14.3x 10.8x 9.3x 0.0x 14.2x 23.0x 29.4x 23.1x 23.7x Rami Levy Chain Stores 10.5x 10.8x 14.6x 11.3x 15.3x 12.6x 16.7x 15.7x 21.3x 20.8x 33.5x 19.5x Al Meera Consumer Goods 32.6x 20.6x 19.1x 19.2x 15.8x 12.8x 19.5x 14.9x 13.0x 17.7x 19.9x 16.1x Pick n Pay Stores 10.7x 10.0x 13.3x 11.3x 11.9x 9.9x 28.2x 30.2x 40.8x 32.6x 33.3x 24.7x Spar Group 10.7x 12.9x 11.6x 11.9x 11.3x 10.3x 17.3x 20.8x 17.4x 16.1x 20.7x 16.7x Shoprite Holdings 11.1x 14.0x 15.5x 11.6x 8.7x 7.7x 20.1x 24.8x 27.5x 22.1x 17.7x 15.2x Victory Supermarkets 6.5x 5.0x 8.4x 7.2x 10.7x 8.7x 12.0x 9.5x 15.8x 12.9x 21.7x 15.1x High 32.6x 20.6x 19.1x 19.2x 15.8x 12.8x 72.1x 30.2x 64.8x 41.2x 33.9x 35.5x Average 11.4x 11.6x 13.4x 11.9x 10.4x 9.9x 21.5x 19.3x 26.5x 22.3x 22.6x 21.2x Median 10.7x 10.8x 13.3x 11.6x 10.8x 9.4x 17.3x 15.7x 21.3x 20.8x 21.7x 19.5x 7

8 Relative Valuation Uchumi is undervalued based on peer comparison, at a target price of Kshs 9.7 Valuation Summary: Implied Price Weighting Weighted Value 52-week Range Football Field 14.0 DCF % 7.7 Current Price 7.9 EV/Ebitda Multiple % 0.1 P/E based 18.5 P/E Multiple % 1.8 EV/Sales based - EV/Ebitda based 1.3 Fair Value 9.7 Current Price 8.1 Upside/(Downside) 20.2% DCF Based Target Valuation Valuation Range EV/Ebitda Multiple e Average Implied metric 11.4x 11.6x 13.4x 11.9x 10.4x 9.9x Implied share price (15.3) (65.3) P/E Multiple * 2016e Average Implied metric 21.5x 19.3x 26.5x 22.3x 22.6x 21.2x Implied share price *Normalized PE based on average ROE 8

9 Appendix Income Statement and Balance Sheet Summary Income Statement (Kshs Mns) 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Sales 13, , , , , , , , ,484.7 Cost of sales 11, , , , , , , , ,517.5 Gross profit 2, , , , , , , , ,967.3 Other incomes Total operating income 3, , , , , , , , ,956.3 Total operating expenses 2, , , , , , , , ,217.5 EBITDA (222.6) (2,228.2) EBIT (222.6) (2,228.2) PAT (3,421.4) Balance sheet (Kshs Mns) 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Total non-current assets 3, , , , , , , , ,736.1 Total current assets 1, , , , , , , , ,113.0 Total assets 4, , , , , , , , ,849.1 Shareholders equity 2, , , , , ,620.4 Total current liabilities 2, , , , , , , , ,898.1 Total liabilities and equity 4, , , , , , , , ,

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