Eurocash SA (WAR:EUR, Financial) (EUSHY, Financial) is a Polish operator of grocery stores and alcohol distribution. Revenue growth has been awesome and the shares trade at a decent valuation. The company gets very little coverage in the U.S. It is a holding of azValor.
There are 139.1 million shares, the stock trades for 27.6 Polish zlotys ($7.80) and the market cap is 3.389 billion zlotys ($1.087 billion). The dividend last year was 0.73 zlotys and the dividend yield is 2.65%. Earnings per share were 0.74 zlotys and the price-earnings (P/E) ratio is 37.3. Based on the past five years' average earnings per share of 1.675 zlotys, earnings per share would be 16.5 zlotys. It takes 3.53 Polish zlotys to buy one dollar. Thus far, the stock seems to trade at a reasonable valuation.
Sales have been outstanding. Revenues were 3.237 billion zlotys in 2006 and grew to 21.22 billion zlotys last year. Net profit grew from 41.57 million zlotys to 190 million zlotys over that time frame. Historically speaking, gross margins have been around 10%, EBITDA margins 2.5%, EBIT 1% to 2% and net profit margins 1% to 1.5%. The margins are small as these are grocery stores.
The balance sheet shows 181 million zlotys in cash and 1.696 billion zlotys in receivables. The liability side shows 3.84 billion zlotys in payables and 343 million zlotys in debt. That is a pretty decent balance sheet. Cash flow from operations were 222.8 million zlotys and capital expenditures were 53.2 million zlotys. Assuming the run rate is the same for the fourth quarter, the free cash flow would be 212 million zlotys and the free cash flow yield would be about 6%. That’s a nice valuation for a growth company. Free cash flow is king. Your dividend, share buybacks, mergers and acquisitions and everything else comes from free cash flow.
Eurocash operates supermarkets, convenience stores and wholesales food under several different brands. Sales are broken into these categories: Tobacco and what the company calls impulse products are 29% of revenues, its Cash and Carry stores 23%, distribution 22%, its ABC stores 14%, food service 11%, alcohol 10% and then some other categories. Essentially, Eurocash gets most of its revenues from tobacco, liquor, wholesale and food.
There are 190 Cash and Carry stores, 920 ABC stores, 1,086 Delikatesy stores and 4,750 franchises that operate under various names. The wholesale division controls 26.5% of fast moving goods, which is alcohol, tobacco, candy, fruit, vegetables and other things sold at convenience stores. I assume Poland has a different way of distributing alcohol than here in the U.S., where we have exclusive beer and liquor distributors.
The Polish economy has been experiencing high growth in gross domestic product, but also seems to have high unemployment. GDP growth was 2.8% in 2016, 3.9% in 2015 and 3.3% in 2014. Unemployment was 8.39% last year, 7% in 2015 and 11.5% in 2014. They say we do not properly report unemployment here in the U.S. since we do not account for people who have given up looking for jobs. I do not know how they compute unemployment.
Luis Amaral is the main shareholder of Eurocash (directly and indirectly through Politra B.V. s.a.r.l.) with the 43.58% of shares. Amaral serves as CEO and chairman of the board. I found out about Eurocash by reading the quarterly report of a Spanish mutual fund azValor. The common stock does not have a dual voting share, which is good.
Last year, the company was on a merger and acquistions tear. It bought 50% of Firmia Rogala, 50% in Delikatesy and several agreements in distribution. With this huge network of retailers, Eurocash can develop and market its own ideas. The company has gotten into craft brewing. Brilliant! Make your own and sell it at your own stores!
Shares were beaten up when third-quarter numbers were not what analysts expected. Some people think some of these divisions have run out of steam. EBITDAÂ was down 17.7% year over year and shares fell 14% in one day.
Many retailers that have a presence in Poland. I was curious to see if Lydl and Aldis are there and, sure enough, they are. These are two fantastic grocers that are tough to compete with. But since Eurocash seems to focus so much on alcohol and tobacco, perhaps they will not compare apples to apples.
I like Eurocash. It is in a growth country and it is easy to understand. I am sure the pink sheet is pretty thinly traded. Growth is great. I have never invested in Poland, but if you want into Eastern Europe, a simple, understandable company like Eurocash seems to be a good way to make an entry.
Disclosure: We do not own shares.
