OREANDA-NEWS. November 8, 2011. Renaissance Capital, the leading emerging markets investment bank, has expanded its EMEA consumer & retail sector research coverage with an initiation report on Polish food retailers, Jeronimo Martins (rated HOLD at Renaissance, with a EUR14.1/share target price, implying 9% upside potential to the current share price); and Eurocash (rated HOLD, with a PLN26.1/share target price, implying 4% upside potential).

Poland’s food retail market was the seventh-largest in Europe in 2010, according to retail analyst, Planet Retail. Renaissance Capital estimates the market size (based on official statistics) at USD 69bn in 2010, and expects the market to grow at a zloty-based 6% CAGR in 2010-2015. Penetration of modern retail formats in Poland, at 51%, is greater than in Russia and Turkey (food retail markets already covered by Renaissance Capital), although still significantly lower than the 80-85% in developed European markets. A high proportion of the population is rural, and the country has a cultural attachment to traditional independent small shops, notes the report, with the average Polish citizen making 361 store visits annually (vs 231 in Russia). Accordingly, Renaissance analysts are positive on the sustainability of traditional retail in Poland.

Jeronimo Martins is a play on modern formats growth in Poland, Renaissance Capital says. Biedronka (Jeronimo Martins’ retail business in Poland) is a near-monopoly in the discounter segment of the Polish food retail market, having achieved a c. 70% segment share in 2010, on Renaissance estimates. Management believes consumers in Poland are highly price-sensitive, so discounters should outgrow the total food retail market – a point on which analysts agree. Currently, there are 2,300 discounters in Poland, of which 1,707 (74%) are Biedronka stores.

On the other hand, Eurocash is a play on traditional retail. The cash-and-carry business, its main revenue source, depends on the continuity of traditional retail formats, as Eurocash caters for a large number of independent small shops, analysts say. The company is also developing its own franchise retail chain, enabling independent shop owners to switch to franchise operations and gain access to Eurocash’s assortment, logistics and marketing support. Eurocash plays an important role in the consolidation of independent stores located in small cities and rural areas. This low-margin, but high-volume business has a solid return on invested capital, according to Renaissance.

Renaissance Capital believes both stocks look fully priced on multiples. Although analysts acknowledge the strengths of Jeronimo Martins’ and Eurocash’s business models, strategy and management, they believe both stocks are fully valued for their growth profiles. On Renaissance estimates, Jeronimo Martins trades at 10.9x EV/EBITDA 2012, and Eurocash at 11.0x – implying a 22-23% premium to Russia’s X5 Retail Group shares and only a 3-4% discount to Russia’s Magnit GDRs (on the Firm’s estimates): analysts believe the growth outlook for Russian retailers is much stronger.