Compelling Q1 regardless of Olympic Games toys

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Mary A. Psyllaki Research Analyst +30 210 7720171 psyllaki@pksec.gr Retail Toys re-iterating Overweight Vassilis Theodorou Research Director +30 210 7720170 theodorou@pksec.

1 Mary A. Psyllaki Research Analyst Retail Toys re-iterating Overweight Vassilis Theodorou Research Director Compelling Q1 regardless of Olympic Games toys Category: Q results Review Price: 5.06 (25/11/04) Target Price: 6.30 Athens General Index: $ / = Valuation Methodology DCF DCF assumptions OCF 10-yr CAGR 5.2%, WACC: 9% DCF target price ( ) 6.30 Upside potential 25% Estimates Under Greek GAAP Jun-03 Jun-04 Jun-05e Jun-06e Jun-07e Turnover ( m) % chng 28.8% 26.1% 17.1% 12.9% 10.0% EBITDA ( m) % chng 35.9% 33.3% 15.4% 11.3% 8.6% EBT ( m) % chng 21.3% 38.9% 16.7% 14.2% 10.5% Net Income ( m) % chng 27.1% 45.5% 12.7% 18.8% 14.7% EPS (Euro) % chng 27.1% 45.5% 12.7% 10.1% 11.6% EV/Turnover (x) EV/EBITDA (x) P/E (x) P/BV (x) RoE (%) 30.9% 36.2% 32.7% 29.6% 26.8% RoIC 12.6% 16.2% 15.7% 16.6% 17.4% DPS ( ) Div.Yield (%) 3.9% 4.0% 3.8% 4.2% 4.8% W.No shares (m) Explanatory notes: Fiscal year-end prices (June) used for EV/Turnover, EV/EBITDA, P/BV & Div.Yield We assume full conversion of bonds to stocks in Oct. 11 th, 05 Stock data Price range 52-week ( ) Outstanding No of shares 45,619,200 Avg daily shares traded (3M) 24,737 Market cap ( m) Reuters / Bloomberg BABY GA / BABr.AT Free float (e) 45.5% Out/under performance since June04 5.5% Out/under performance since Dec03-6.4% Contact: IRO K.Papaevangelou / Internet site Comparables Curr Yr Est. P / E (x) EV/EBITDA (x) Toys R Us Jumbo discount -55.1% -17.9% Company Description Jumbo is a retailer and wholesaler of toys, infant products, books and stationery, enjoying a share of 28% in the Greek market, the size of which is estimated at 650m. The company s distribution network currently counts 36 retail stores, 33 in Greece and 3 in Cyprus, with total sales surface of 222,000m 2. Q Results Highlights Greece s largest retailer of toys, baby and bookstore products, Jumbo, released on Monday November 15 th financial results for the first quarter of the fiscal year that ends June 05. Group sales came in at 50.9m, up 33.2% y-o-y, EBITDA at 11.3m, up 42.1% y-o-y with margin improvement of 140 bps, and pre-tax profit at 6.44m, up 62.8% before minorities and 65.6% after minorities. Parent sales went up by 34.5% to 36.4m, EBITDA by 39.5% to 10.1m and pre-tax profit by 55.5% to 6.5m. Overall a strong set of results above expectations. Top-line was strong due to the continuous expansion and maturity of the group s retail network, as well as the positive impact of Olympic Games (OG) products. The company opened 1 new store in August (Corinthos), and thus, operated a total of 34 stores at the end of September 04. Sales of OG products contributed c. 3.6m during Q1, which accounts for 9.9% of parent growth or 9.4% of group growth. Sales mix between Greece and Cyprus stood at 96.4%-3.6% in Q Toys represented 57.8% of sales, baby products 25.3% and books 16.6%. The strong improvement in the EBITDA line was driven by contained distribution expenses, which represented 21.3% of sales versus 22.9% in Q103-04, albeit a slight gross margin deterioration of 20 basis points to 49.8%. Below the EBITDA line, depreciation and financial costs increased by a significantly lower rate, in line with expectations. Recall also that Jumbo acquired last year the minority stake in its Cyprian subsidiary, Jumbo Trading Ltd, therefore does not pay minorities since Q Working capital increased by a lower rate than sales (9.6% y-o-y). Capex stood at 3.6m versus 16.6m in Q and mainly involved investments for the expansion of the stores network. Net debt declined by 16.1m q-o-q to 73.5m. Outlook According to the company, sales and profits increased by 35% and 60% respectively during the first 4 months of the current fiscal year, in line with Q1 trends. Based on the business performance in the year to date and the initiation of a program to substitute OG sales, the management re-iterated its guidance for double-digit growth in sales and profits this year, while specified the rate to 12%. Page 1

2 Outlook (cont.) In the following years, the company will continue to grow through the development of its stores network, while expansion in the Balkans is expected in The management feels confident that market share will easily climb to 30% in 05 versus 28% today. The group will operate a total of 39 stores by the end of June 05 (6 openings). Takeaways from Annual General Meeting The company held an Annual General Meeting on Wednesday November 24th, which approved a dividend per share of 0.17 for the fiscal year that ended in June 04. The dividend is increased by 41.7% y-o-y and corresponds to a yield of 3.4% on current share price. Ex-dividend date was November 25th. The payment of the dividend will start on January 10th During the meeting, the management referred to the following issues: Sales growth during the first 4.5 months of FY04-05 remains close to first quarter levels (parent: +34.5%, group: +33.2%) Sales of Olympic Games (OG) products, which started in April 2003, contributed a total of 11m until the end of Q The impact on the group s growth was approximately 0.4% in FY02-03, 4.7% in FY03-04 and 9.4% in Q OG sales this year are equivalent to the opening of one big or 2 small stores. Therefore the substitution of OG sales calls for the opening of one more store than previously anticipated. Jumbo has opened 3 new stores since June 04 (Corinthos, Karditsa & Volos) and currently operates a total of 36 stores (33 in Greece and 3 in Cyprus). The plan is to open 3 more stores by the end of June 05 (Nea Ionia, Alexandroupoli, Larnaka) and 2 more stores by the end of 05 (Alimos, Corfu). Expansion in the Balkans is certain. However, the potential for the opening of 15 more stores in Greece allows the management to wait until the political and economic environment improves in these markets. The group is tax audited for all the fiscal years up to now with a total loss of a mere 0.17m. Almost 100% of bondholders of the company s 11.8m convertible bond accepted the bond s extension under the terms set by the EGM of Dec 17th 03 (4-year extension to Oct 08, exchange ratio at 1.8x, redemption price at %) With regard to competition and market consolidation, the management anticipates radical changes in the following years, while believes that Jumbo is well positioned to react and participate in potential M&As and coalitions. Change of estimates The management s target for sales growth of 12% this year implies growth of approximately 6.6% for the remaining 3 quarters of the year, a rate that is very low in our view. Based on the above and the business performance during October and half of November, we continue to forecast sales growth of 17% to 221m in FY04-05 (at the high end of consensus). Profit wise, we continue to adopt a conservative stance and forecast slight margin deterioration. Thus, we are looking for FY04-05 EPS of 0.61, up by 12.7% y-o-y, although we acknowledge that there is significant upside risk in our bottom-line estimate given the considerable operating leverage evidenced in Q1. For the following years, we assume continuous top-line growth on the back of new store openings and a slight deterioration of margins to incorporate the management s conservative stance. The only change in our model is the gradual decrease of the effective tax rate to 25% in 2007 following the Greek government s announcement for corporate tax reform. Our target price is set at 6.3 per share versus 6.0 previously, solely due to changes in the tax rate. View & Valuation We maintain our overweight recommendation for Jumbo, which we underpin with the following arguments: strong business performance leading market position with continuous profitable share gains efficient management good track record attractive valuation We highlight the following concerns: limited long-term growth prospects in the domestic market, given the unfavourable demographics and small market size risk for market share gains of big super-market chains that might exert price pressure to toys retailers need to remain innovative given the strong growth of substitutes for traditional toys: video and internet games, or even kids mobile phones The stock has under-performed the ASE General Index by 6.4% so far in 04, now trading at 8.3x EPS, 5.5x EBITDA and 1.5x sales of June-05e. Page 2

3 Table 1: Jumbo Q results Profit & Loss items ( m) Q Q P&K Act Vs P&K Turnover % % chng 29.6% 33.2% 30.0% Cost of Goods Sold % % chng 31.0% 33.8% 33.4% % of sales 50.0% 50.2% 51.3% Gross profit % chng 28.2% 32.5% 26.6% % of sales 50.0% 49.8% 48.7% Other operating income % % chng 24.4% 61.6% 30.0% Total Gross profit % % chng 28.2% 32.8% 26.7% % of sales 50.6% 50.4% 49.3% Administration Expenses % % chng 37.5% 36.1% 35.0% % of sales 6.8% 6.9% 7.0% Distribution Expenses % % chng 27.7% 23.5% 22.9% % of sales 22.9% 21.3% 21.7% EBITDA % % chng 25.9% 42.1% 28.1% % of sales 20.8% 22.2% 20.5% Depreciation % % chng 17.7% 6.8% 12.0% EBIT % % chng 29.2% 55.2% 34.1% % of sales 15.2% 17.7% 15.7% Net interest expense (income) % % chng 37.8% 4.7% 8.0% XO income (loss) % % chng 64.6% % 0.0% Pre-tax profit before minorities % % chng 27.7% 62.8% 41.2% % of sales 11.9% 14.6% 48.8% Minorities Pre-tax profit after minorities % % chng 26.5% 65.6% 43.7% % of sales 11.7% 14.6% 13.0% Page 3

4 Table 2: Geographical Breakdown Sales Q % of total Q % of total % chng Parent % % 34.5% Cyprus % % 5.2% Group % % 33.2% Table 3: Sales breakdown per category of products Sales Q % of total Q % of total % chng Toys % % 35.2% Infant % % 27.1% Books & other % % 35.5% Total % % 33.2% Table 4: Stores Number of stores Jun-02 Jun-03 Jun-04 Q Jun-05 Attica Greek Province Cyprus Total No of stores Net Additions Table 5: Discount Cash Flow Valuation Jumbo DCF Risk Free rate 4.2% Risk premium 5.4% Market return 9.6% Beta 1.22 Rate on Debt 4.5% Debt/(Debt+MCap) 28.7% WACC 9.0% PV of Cash Flows ( m) Perpetuity Growth 0.0% Residual Value ( m) Less: Net Debt ( m) 89.6 Equity Value ( m) Equity Value per share ( ) 6.3 Upside potential 25% Source: Company data, Bloomberg, P&K Research estimates Page 4

5 Table 6: Jumbo consolidated Balance Sheet & Cash Flow statements and analysis (under Greek GAAP) (in Euro m) BALANCE SHEET (BS) ITEMS Jun-03 Jun-04 Jun-05e Jun-06e Jun-07e Net fixed assets Tangible assets Intangible assets Other fixed assets Accumulated Depreciation/Amortization Investments Current Assets Accounts receivable Inventories Cash Other cash equivalents (for balancing) Deferred accounts TOTAL ASSETS Net debt position Shareholders' equity Provisions Long-term liabilities Short-term liabilities Accounts payable Liabilities for taxes-insurance Liabilities to banks Dividends Other short-term liabilities Deferred accounts TOTAL EQUITY & LIABILITIES RATIO ANALYSIS ON BS ITEMS Jun-03 Jun-04 Jun-05 e Jun-06e Jun-07e Liquidity: Current ratio Acid Test Activity: Avg receivables to turnover days Avg creditors to purchases days Avg inventories to purchases days COGS/Inventories Financial Structure: Debt to equity Bank debt to equity Net Debt / Total Book Capital 57% 54% 50% 37% 29% Fixed to total assets 51.2% 48.9% 48.5% 47.2% 44.6% Interest coverage (ebit) Profitability: Return on Total Assets 9.3% 11.6% 11.3% 12.0% 12.5% Return on Equity 30.9% 36.2% 32.7% 29.6% 26.8% Return on Invested Capital 12.6% 16.2% 15.7% 16.6% 17.4% CASH FLOW (CF) STATEMENT Jun-03 Jun-04 Jun-05 e Jun-06e Jun-07e Profit after tax before minorities Plus: Depreciation & amortization Plus: Chng in provisions Plus:Interest expenses Plus: Changes in taxes payable Gross cash flow Plus: Chng in accounts payable Plus: Chng in other current liabilities Less: Chng in accounts receivable Less: Chng in inventories Less: Chng in deferred accounts Working capital chng Operating cash flow Less: Purchases of fixed assets Less: Chng in investments Free cash flow Less: Dividends paid Less: Interest expenses Plus: Equity chng Plus: Debt chng Plus: Other Chng in Cash Position Cash Position Note: As of June 06, we treat the company s 11.8m convertible bond as equity, since we assume full conversion of bonds into stocks on Oct. 11 th, 05. Page 5

6 Table 7: Jumbo consolidated Profit & Loss statements and analysis under Greek GAAP (in Euro m) PROFIT & LOSS (P&L) ITEMS Jun-03 Jun-04 Jun-05 e Jun-06 e Jun-07 e Turnover % chng 28.8% 26.1% 17.1% 12.9% 10.0% Cost of sales Other operating income Total gross profit % chng 30.8% 28.9% 16.4% 12.3% 9.5% Gross profit margin 48.6% 49.7% 49.3% 49.1% 48.8% Administration + Distribution expenses % of turnover 23.1% 22.8% 22.9% 23.0% 23.1% EBITDA % chng 35.9% 33.3% 15.4% 11.3% 8.6% EBITDA margin 25.4% 26.9% 26.5% 26.1% 25.8% Depreciation & amortization % chng 31.1% 10.3% 16.9% 11.8% 10.2% Operating profit (EBIT) % chng 37.3% 39.5% 15.0% 11.2% 8.2% Operating profit margin 20.0% 22.1% 21.7% 21.4% 21.0% Net interest expense Extraordinary profit (loss) Pre-tax profit % chng 21.3% 38.9% 16.7% 14.2% 10.5% % of turnover 16.8% 18.5% 18.5% 18.7% 18.7% Income tax % effective tax rate (parent) 32.6% 30.3% 35.0% 32.0% 29.0% Minority stake in profits % chng 18.8% % n.a. n.a. n.a. Minority profit/pre-tax profit 1.1% 0.0% 0.0% 0.0% 0.0% Profit after tax % chng 27.1% 45.5% 12.7% 18.8% 14.7% Net profit margin 11.3% 13.0% 12.5% 13.2% 13.8% EPS after tax (in EURO) EPS chng 27.1% 45.5% 12.7% 10.1% 11.6% Dividends Dividend policy: Payout Ratio (parent) 36.1% 36.5% 37.6% 38.6% 38.7% DPS (in EURO) % chng 20.0% 41.7% 11.8% 10.5% 15.7% Retained profit and reserves BVPS (in EURO) % chng 23.2% 24.6% 25.3% 22.7% 19.8% Market cap Weighted number of shares 45,619,200 45,619,200 45,619,200 49,205,108 50,595,840 End-year number of shares 45,619,200 45,619,200 45,619,200 50,595,840 50,595,840 EV End-year stock price (June / current) % chng of common stock price -4.9% 39.6% 17.7% n.a. n.a. General index (June for historical / current) n.a. n.a. GI Performance (June - current) -15% 24% 12% n.a. n.a. Out/under performance (since June) 10.5% 15.5% 5.5% n.a. n.a. End-year stock price (Dec / current) n.a. n.a. % chng of common stock price 70.4% 10.0% 10.0% n.a. n.a. General index (Dec for historical / current) n.a. n.a. GI Performance (Dec - current) 29% 16% 16% n.a. n.a. Out/under performance (since Dec) 40.9% -6.4% -6.4% n.a. n.a. Note: As of June 06, we treat the company s 11.8m convertible bond as equity, since we assume full conversion of bonds into stocks in Oct. 11 th, 05. Page 6

7 Equities Research Equities Institutional Vassilis Theodorou Director George Polites Director Costis Papakonstantinou Head Local Institutionals Alexandros Boulougouris Maria Douli Nick Kastriotis Manos Giakoumis Andreas Kontogouris Nicholas Kyriazis Theodore Ritsos George Lymberopoulos Damianos Papakonstantinou Mary Psyllaki Gina Georgopoulou Helen Herra Merve Kosker Head Office Str Address / Postal code Tel/Fax Web Athens 91 Michalakopoulou / / Info@pksec.gr Investment ratings Overweight, Equal weight, Underweight: Denote notional investment ratings (not recommendations) pegged to the performance of the General Index (& MSCI Europe Telecoms for Telecoms), which imply a positive, neutral and negative view respectively. Overweight: The stock is expected to perform above the General Index (and MSCI Europe Telecoms in the case of telecoms) Equal weight: The stock is expected to perform in line with the General Index (and MSCI Europe Telecoms in the case of telecoms) Underweight: The stock is expected to perform below the General Index (and MSCI Europe Telecoms in the case of telecoms) Disclaimer The research team of P&K Securities prepares the information contained in this report. Its contents are for information only and for the sole use of the recipient. It is not to be reproduced or copied or transmitted or made available to others in any form or manner. Under no circumstances it is to be considered as an offer to sell or solicitation to buy, any investment. The information contained has been obtained or based upon, sources which we believe to be reliable but we do not guarantee its accuracy or completeness and should not be considered as recommendations but rather as a basis from which strategies can be built, taking into account specific investor preferences, risk reward and time constraints as well as divergent assumptions. P&K Securities or their employees have or may have a long or short position or holding in the securities, mentioned in the report. Neither this Document nor any copy of it may be taken, transmitted into or distributed in the US nor may it distributed to US citizens or corporations. P&K Securities AE issue that is a member of Athens Stock Exchange regulated by the Greek Capital Markets Committee and the Athens Stock Exchange Authority this document in Greece that is a member of Athens Stock Exchange regulated by the Greek Capital Markets Committee and the Athens Stock Exchange Authority. Entire report P&K Securities AE, All rights reserved. Page 7

COUNTRY: GREECE PRICE: 4.60 SECTOR: RETAIL ATHEX Index: 2, DATE: September 21 st, 2004 TARGET PRICE: 5.8

AN AFFILIATE OF THE NATIONAL BANK OF GREECE GROUP BUY COUNTRY: GREECE PRICE: 4.60 SECTOR: RETAIL ATHEX Index: 2,366.41 DATE: September 21 st, 2004 TARGET PRICE: 5.8 Amalia Karamitsoli Equity Analyst akaram@ex.nbg.gr