Later this month, the Żabka Group, which manages over 10,000 shops, can be expected to go public. The last significant IPO on the Polish stock exchange was that of Allegro, whose offering amounted to PLN 10.6 billion with a valuation of PLN 44 billion. The owners of Żabka, intend to sell shares worth PLN 6.45 billion at a valuation of PLN 21.5 billion, so it will not be the biggest debut, but it may be significant. However, let's look at the details of this valuation to find out what potential it could have.
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First yellow card early in the match
The immediate purpose of Żabka's debut is not to raise capital for the company's development, but to sell 30 per cent of all shares held mainly by the US private equity fund CVC Capital. This could be the first warning sign for potential investors, as one does not sell the hen that lays golden eggs.
Source: Żabka Group prospectus
Żabka's planned debut is expected to facilitate access to capital for future growth and acquisitions, increasing the company's credibility in the eyes of investors. However, the question arises why the owners do not decide to issue new shares already at the debut instead of selling their shares. Management argues that a stock market debut will raise the Group's profile, attract new investors and provide liquidity for existing shareholders, while motivating management and enhancing the company's image as an employer.
Żabka's successes to date
Comparable in some ways to the Uber model, Żabka's business model is based on converting a significant part of its operations to franchisees, which significantly reduces the cost and risk of doing business. The company's primary focus on data analytics and logistics has streamlined the convenience ecosystem it has created. This can be seen in the data - sales grew at an annual rate of 23 per cent between 2000 and 2023, and more than 1,000 new shops were opened last year. Future growth potential also lies in international expansion, particularly in Romania, where the company sees great opportunities. Żabka already has more than 10,500 shops and plans include growing the chain to 19,500 outlets in Poland and 4,000 in Romania and doubling overall sales in the next five years.
Żabka's business model, based on meeting the needs of customers who value fast, convenient shopping (not necessarily the cheapest), allows the company to generate higher margins than its competitors. For example, Dino Polska's EBITDA margin is 8 per cent, while Żabka achieved a margin of 12.4 per cent in 2023. As a result, the company benefits from economies of scale, and opening new shops involves lower costs than chains such as Biedronka or Dino. In the first half of 2024, Żabka recorded sales growth of 23 per cent year-on-year, while Dino recorded growth of 15 per cent.
Source: Tradingview
It is worth remembering, however, that Żabka operates on a franchise model, which involves giving 16.5 per cent of revenue to serve more than 9,000 franchisees. This affects the final net profit margin (after taking into account depreciation and amortisation and interest on debt), which is only 1.8 per cent. By comparison, the net margin for Dino Polska is 5.2 per cent and for the Portuguese owner of the Biedronka chain, Jerónimo Martins, 1.9 per cent. Such a low net margin for Żabka is due to the very high level of debt, which accounts for 91 per cent of the company's assets, compared to 43 per cent for Dino Polska and 79 per cent for Jerónimo Martins.
Valuation of Żabka like a tech giant
It is worth remembering the principle often emphasised by Professor Aswath Damodaran: ‘keep your eyes on the price’. A good investment is about buying an asset below its intrinsic value, rather than picking trendy and widely advertised products. Particular caution should be exercised when investing in high-profile IPOs, which often end in negative results. Allegro's recent major IPO is a case in point - after four years, the company's shares are trading 15 per cent below the offer price on the day of the IPO.
Source: Tradingview
Żabka's top offer price per share is PLN 21.50, which translates into a capitalisation of PLN 21.5 billion. For comparison, the Polish shop chain Dino is valued at PLN 33.5 billion and the Portuguese owner of Biedronka (Jerónimo Martins) is valued at PLN 48.1 billion (€11.2 billion). At first glance, it seems that Żabka is much lower valued compared to its domestic competitors. However, after looking at the valuation ratios, the situation looks different. The price-to-earnings (P/E) ratio for Żabka is around 45, while it is 28 for Dino Polska and 15.7 for Jerónimo Martins. Of course, this ratio does not take into account potential future earnings growth, but it suggests that Żabka's valuation assumes more than twice as fast earnings growth compared to its competitors.
Management announced in the prospectus that it plans to double sales over the next five years, which would imply annual profit growth of around 15 per cent, compared to a dynamic 23 per cent per year to date over the past two decades. However, a valuation of £21.50 per share would require growth of around 24 per cent per annum over the next five years, higher than management's own forecasts. This is another warning sign, suggesting that the investment in Żabka's IPO could follow a similar path to the Allegro or Pepco debuts, leading to long-term shareholder disappointment.
Source: Conotoxia own analysis
Grzegorz Dróżdż, CIIA, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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