grupo exito - ULTRASERFINCO SA Comisionistas de Bolsa

GRUPO EXITO
COVERAGE
Colombia— Consumer Services — Retail
SELL / TP: 27,200 per share
IN QUEST OF SUSTAINABILITY
We are initiating coverage of Grupo-Exito, with a TP of COP 27,200 for 2014YE, an
implicit downside of 9.3%, and with a SELL recommendation. Our investment thesis
is supported by a stock price that is ahead of our numbers and peer’s earnings
multiples, even though we strongly believe Grupo-Exito is in the right path to
improve return-on-invested-capital (ROIC). For us, market players have just pushed
the stock to an overvalued territory.
Maintaining competitiveness in the current retail industry is challenging, but GrupoExito is doing its homework. Investments in its real state segment, strategic
acquisitions/alliances for intangibles and the strengthening of its Omni-channel
concept are factors that will assure sustainability and also boost ROIC. Grupo-Exito’s
strategy will be a ROIC booster, although it will not be reflected on FCFF as fast as it is
implicit in current stock prices due to heavy CapEx and an increasing effective tax-rate.
For us, Grupo-Exito is doing what it has to do for chasing consumers that are focusing
on the shopping experience more than ever: It is combining its brand recognition and
market penetration with a local and specialized approach (SurtiMax and SuperInter)
while using its traffic to develop a profitable real estate segment and leverage its
complementary businesses.
Positive momentum in operating margins will continue in the near future, although
we believe this trend is already priced in. For us, Grupo-Exito’s ebit margin
(FY13=5.1%) and ebitda margin (FY13=8.7%) are the harvest of a sound multichannel
retailing combined with an excellent marketing strategy through its 3 top-of-mind
brands (Carulla, Exito and Surtimax). Moreover a rock solid brand such as EXITO and
the ownership of a 30-private label portfolio imposes a costly barrier of entry for
competitors, particularly in the discount market.
April 21, 2014
Stock Data
Ticker BVC
Current price (COP)
Outstanding shares (Mill.)
5y Beta vs. COLCAP
Free float
Market capitalization (US$ Mill.)
52 Week range (COP)
Avg. daily volume (US$ Mill.)
Colcap Index Weight
EXITO
29,980
448
0.74
34%
6,958
[25,080 - 33,500]
3.8
5.3%
Financial Information and Multiples
ROaE
ROaA
ROIC
P/E
P / BV
EV / EBITDA
EV / FCFF
Yield
2012
6.4%
4.7%
8.0%
33.4x
2.1x
15.8x
21.8x
1.2%
2013
5.7%
4.2%
8.1%
30.6x
1.7x
11.6x
19.0x
1.8%
2014E
5.0%
3.6%
8.1%
33.7x
1.7x
10.2x
313.5x
1.8%
2015E
6.1%
4.4%
8.0%
27.2x
1.7x
8.9x
102.7x
1.9%
2016E
7.1%
4.8%
9.0%
23.9x
1.7x
7.9x
47.5x
2.2%
Grupo-Exito Vs Colcap
145.0
COLCAP
ÉXITO
135.0
125.0
115.0
105.0
95.0
75.0
mar/14
dic/13
sep/13
jun/13
mar/13
dic/12
sep/12
jun/12
mar/12
dic/11
sep/11
jun/11
Beyond the stock price, we expect that strategic acquisitions, investments in the real
estate segment, a continuous optimization of working capital and a customer centric
relationship will lead to 10 years of improvements in (1) asset turnover (+60%), (2)
both EBIT margin (+220bps) and EBITDA margin (+130bps), and (3) Return on
invested capital (ROIC) (+700ps). However, our target price can be explained mostly
by the FCFF the company generates after 2018 (not soon). Also, dividends were not
increased in 2014 due company’s intentions to make further strategic acquisitions
without depending on capital market condition, so dividend protection at current prices
is not huge. For us, Grupo-Exito has a sound strategy and is a great company that
exposes investors to the vibrant Colombian retail industry but we prefer a lower
market price level to rate it as a ‘buy’.
85.0
mar/11
The odds are against higher stock prices in the short term as upside potential is
limited for FCFF and earnings multiples are currently at high levels. Grupo-Exito’s
trailing multiples (last-twelve-months) might point to an upside when compared by
operating standards (EV/Sales Grupo-Exito=1.01x vs. Peers=1.3x - EV/EBITDA GrupoExito= 11.6x vs. Peers=12.4x), albeit the bottom line has been weak and the stock is
still trading at high levels vs. trailing earnings (trailing P/E Grupo-Exito=30.6x vs.
Peers=23.8x). While we believe that Exito will continue increasing turnovers and
EBITDA margins, we do not expect huge improvements neither in net income nor in
free cash flows, not only as a result of a heavy CapEx for 2014 (guidance points to
something close to US$250 million), but also due to a +20% effective tax rate that is
here to stay and further working capital optimization is highly improbable as current
cash conversion cycle is already in good levels (-33 days according to our numbers).
Source: Bloomberg
Rafael España Amador
Consumer Services and Holdings
Analyst
[email protected]
(571) 6514646 Ext. 4228
Jose F. Restrepo, CFA
Equity Strategist
[email protected]
(574) 3106510
Positive Catalysts
Negative Catalysts
Free-up of working capital as a result of cost related synergies
 An objection to the sales agreement between Grupo-Exito
and SuperInter made by the Colombian consumer watchdog.
acquired from SuperInter (we expect revenue related synergies).
The company has COP 2.7 trillion (US$1.3 billion) in cash &
marketable securities that could be used in acquisitions, a
possible shares buyback or for increasing dividends.
An acquisition motivated by cost-synergies (marketing,
operations and distribution) instead of motivated by revenuesynergies.
Boost in sales arising from an unexpected ramp up in domestic
demand (i.e. retail sales growth ex gas & vehicles > 8%).
Table 1. Income Statement
Table 2. Balance Sheet
2014E
11,934
-8,763
3,171
-2,612
559
1,053
-48
510
-112
398
1.38X
1.09X
4.68%
8.83%
91.2%
78.11%
3.34%
2015E
13,431
-9,854
3,577
-2,858
718
1,215
-32
684
-191
493
1.40X
1.19X
5.35%
9.04%
95.3%
72.08%
3.67%
COP Millon
Cash
Marketable Securities
Inventories
Receivables
Other current assets
Long term Receivables
Investments
PPE, Net
Intagibles, net
Other non-current assets
Total Assets
Financial debt
Suppliers
Payables
Other liabilities
Total liabilities
Minority interest
Total Equity
Debt to Total Capital
Net Debt to Capital
2016E
14,761
-10,826
3,935
-3,033
902
1,356
-80
819
-257
562
1.49X
1.25X
6.11%
9.19%
90.8%
68.61%
3.81%
Source: Grupo-Exito and Serfinco estimates
-700
Source: Grupo-Exito and Serfinco estimates
Source: Grupo-Exito and Serfinco estimates
Table 3. Valuation Ratios
Figure 3. Solvency and Liquidity
Net Debt / EBITDA
20x
15x
8.9x
6.5x
10x
5x
0.3x
Source: Grupo-Exito and Serfinco estimates
0x
2024 E
2023 E
-5x
2022 E
2021 E
2020 E
0.0x
2019 E
2018 E
2017 E
2016 E
2015 E
2014 E
2013 E
2012
2011
Interest coverage ratio
1,500
1,000
17.3x
500
11.3x
0
-500
-1,000
6.8x
-1,500
6.7x
3.5x
-2,000
-2,500
-2.6x-2.7x -1.0x -0.4x
-3,000
2010
COP billon
Net Financial Debt (left axis)
EPS
Book value
Dividend per share (COP)
Payout
Yield (Last Price)
Shares (COP million)
Last price
Target Price
ROaE
ROaA
Last Traded Price /E
Target Price /E
EBITDA (COP billion)
NOPAT (COP billion)
FCFF (COP billion)
Last Traded EV/EBITDA
Target EV/EBITDA
Last traded EV / FCFF
Target EV / FCFF
Last Traded Price / BV
Target Price / BV
2012
1,062
16,961
435
41%
1.23%
448
35,500
2013
979
17,562
531
54%
1.77%
448
30,000
6.41%
4.72%
33.4X
5.67%
4.15%
30.6X
859
420
622
15.8X
932
436
569
11.6X
21.8X
19.0X
2.1X
1.7X
2014E
2015E
889
1,102
17,822 18,102
531
578
60%
52%
1.77%
1.93%
448
448
29,980
27,200 E
5.03%
6.14%
3.64%
4.38%
33.7X
27.2X
30.6X
24.7X
1,053
1,215
437
518
34
105
10.2X
8.9X
10.0X
8.6X
313.5X 102.7X
304.9X
99.8X
1.7X
1.7X
1.5X
1.5X
Source: Grupo-Exito and Serfinco estimates
2016E
1,255
17,251
661
53%
2.21%
448
7.10%
4.77%
23.9X
21.7X
1,356
619
227
7.9X
7.7X
47.5X
46.2X
1.7X
1.6X
2024 E
4%
2023 E
-200
2022 E
6%
2021 E
300
2020 E
8%
2024 E
2023 E
2022 E
2021 E
2020 E
2019 E
2018 E
2017 E
2016 E
2015 E
2014 E
2013
2012
2011
0%
800
2019 E
2%
8.1%
1,300
2018 E
3% 9.2%
8.1%
2016E
1,572
122
1,491
538
58
71
178
3,350
2,560
2,160
12,101
1,160
2,034
503
666
4,363
16
7,722
9.6%
-7.4%
1,800
2017 E
10%
10.5%
2,300
2016 E
5%
2,800
2012
7.3% 12%
5.1% 4.7%
4.8%
16%
14%
6.5%
8%
6%
15.2%
2011
8.4%
10.0%
3,300
18%
COP billion
9%
8.7%
2015E
1,645
42
1,365
490
53
62
168
3,141
2,405
2,101
11,472
479
1,851
458
566
3,354
15
8,103
4.2%
-17.5%
Operating tax
CapEx, Acquisitions and Leasehold improvements
Wk Investments
EBITDA
FCFF
ROIC
9.5%
8.8%
2014E
1,476
448
1,222
435
47
57
159
2,933
2,254
2,035
11,068
390
1,756
407
522
3,075
15
7,977
3.5%
-23.8%
Figure 2. Free Cash Flow to the Firm Breakdown
EBIT margin
11%
2013
1,772
982
1,139
418
42
62
137
2,279
2,102
1,851
10,785
252
1,784
405
468
2,910
14
7,861
2.3%
-46.7%
Source: Grupo-Exito and Serfinco estimates
Figure 1. Profitability Indicators
EBITDA margin
2012
1,591
916
1,106
360
45
41
125
2,249
2,105
1,784
10,322
277
1,654
398
388
2,717
14
7,592
2.7%
-41.6%
2015 E
2013
10,697
-7,855
2,842
-2,298
545
932
5
548
-109
438
1.37X
1.01X
5.09%
8.71%
100.6%
80.03%
4.10%
2014 E
Sales
Cost of Goods
Gross profit
Administrative expenses
Operating income
EBITDA
Non-operating income
Earnings before taxes
Taxes
Net Income
Financial Leverage
Asset Turnover
EBIT margin
EBITDA margin
Non-Operating Burden
Tax Burden
Net Margin
2012
10,230
-7,560
2,670
-2,176
494
859
67
559
-84
475
1.36X
1.02X
4.83%
8.39%
113.1%
85.05%
4.65%
 UYU/COP devaluation and persistent inflation in Uruguay can
hurt the income statement and the value of Disco and
Devoto
2013
COP billon
 An exercise of the call option for Disco and Devoto under
abnormal market conditions (we do not expect the cash
outflow in our model).
IN QUEST OF SUSTAINABILITY
We are initiating coverage of Grupo-Exito, with a TP of COP 27,200 for 2014YE, an implicit downside of 9.3%, and with a
SELL recommendation. Our investment thesis is supported by a stock price that is ahead of our numbers even though
we strongly believe Grupo-Exito’s is in the right path to improve return-on-invested-capital (ROIC). For us, market
players have just pushed the stock to an overvalued territory.
Sustainability in a challenging environment is a must and Grupo-Exito is doing its homework. Investments in its real
state segment, strategic acquisitions/alliances for intangibles and the strengthening of its Omni-channel concept are
factors that will boost competitiveness and ROIC. We believe Grupo-Exito’s strategy will be a ROIC booster, although it
will not be reflected on FCFF as fast as it is implicit in current stock prices due to heavy CapEx and an increasing effective
tax-rate. For us, Grupo-Exito is doing what it has to do for chasing consumers that are focusing on the shopping
experience more than ever: It is combining its brand recognition and market penetration with a local and specialized
approach (SurtiMax and SuperInter) while using its traffic to develop a profitable real estate segment and leverage its
complementary businesses.
Throughout the following sections we develop what we believe is needed to be successful in the current retail
environment and why Grupo-Exito’s strategy will boost ROIC. We also remark our positive view in the agreement for
SuperInter transaction.
RETAIL INDUSTRY IN COLOMBIA: A CHALLENGING ENVIRONMENT
The conditions for a rivalry surge at the intra-industry level have been mounting throughout the last decade, triggered
by the arrival of international competitors to Colombia. Also, innovations in inventory management systems and the
growing of a young-middle income class eager for different purchase experiences increased the scope of the retail
business in Colombia -and the threat of new entrants to the industry- including other channels such as malls, apparel
stores, discount stores, telephone sales and both online and mobile app stores.
We believe the following factors will open the door for strong competition in the upcoming years: i) consolidation of
industry participants does not seem to be finalized, ii) a softer 5% (real) growth of retail sales (ex. gas & autos) is more
‘normal’ as it is closer to the long term economic growth rate, and iii) lack of familiarity between competitors (a mixture of
Colombian, Chileans, Portuguese and Americans) makes it difficult to read each other’s pricing signals well so the ‘sale’
price should be the new normal.
The entrance of international players accompanied by a softening of the Colombian retail industry growth is the perfect
combination for boosting rivalry among competitors. Between 2010 and 2013 new players arrived to the Colombian
retail scene to benefit from an expected ramp-up in the economy (as of 2010, total retail sales were growing by about
14.9% Y/Y) and to preparing themselves for opportunities that the European crisis would probably open (possibility of
Carrefour leaving the local market). Throughout that period LaPolar (2010), Casa Ideas (2010), PriceSmart (2010), ARA (by
Jeronimo Martins 2012), Cencosud (2012) and Ripley (2013) irrupted the Colombian market, not to say that Falabella
made a killing with more than US$1.3 billion yearly sales in 2010 (2013 sales were more than US$1.9 billion). Not only a
market fight motivated by new market players fervent for Colombian consumers is standing at the door and knocking, but
also a halving of the yoy growth rate in retail sales (ex. gas & vehicles 2010 = 9.6% Y/Y vs. 2013 = 4.6% Y/Y) blurred the
environment and reshaped the retail industry forcing Casa Ideas (2012), Carrefour (sold in 2012 to Cencosud) and LaPolar
(2014) to leave the arena.
Figure 4. Retail Sales Real Growth Rate in Colombia
Figure 5. Grupo-Exito’s Total Sales and SSS Growth
35.00%
26.0%
Retail sales ex. gas
30.00%
21.0%
Retail sales ex.gas & vehicles
25.00%
16.0%
Total sales quarterly growth rate Y/Y
SSS quarterly growth rate Y/Y
Expected effect
of SuperInter's
agreement in
total sales
20.00%
11.0%
15.00%
6.0%
10.00%
5.00%
1.0%
0.00%
-4.0%
-5.00%
Feb-14
Oct-13
Jun-13
Feb-13
Jun-12
Oct-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Oct-08
Jun-08
Feb-08
Feb-09
Source: National Statistics Department
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14 E
2Q14 E
3Q14 E
4Q14 E
-10.00%
-9.0%
Our expected SSS full year growth rate
without including SuperInter is close to
a 4.6% real (7.66% nominal)
Source: Grupo-Exito—Serfinco estimations (assuming SuperInter agreement is approved)
Figure 6. Determinants of Purchase Decision-Making
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Figure 7. Colombian Population (2010-2020)
0.21
0.17
80 and …
70-74
2010
0.33
0.56
60-64
0.70
Age
50-54
40-44
2020
Population under 44 is
0.79 still going to be more
0.54
than 71% by 2020
0.09
0.23
30-34
0.57
0.62
20-24
18-24
25-34
35-44
years
Price
45-54
55-64
18-24
25-34
35-44
years
45-54
0.60
0.23
10-14
55-64
0-4
0.09
0
Store Characteristics
1
2
3
4
Millions of people
5
6
Source: National Statistics Department
Source: BrandStrat — Serfinco S.A.
ADAPTABILITY TO THE NEW CONSUMER IS PARAMOUNT
Figure 8. Colombia’s Socioeconomical-Conditions
Monetary Poverty
58%
Gini
50%
57%
45%
56%
40%
55%
54%
53%
2013
2012
2011
2010
52%
2009
2008
2007
2006
2005
2004
25%
2003
30%
Improving socioeconomic
conditions mean buyers
seek more for emotional
benefits rather than only
functional benefits
2002
35%
Gini Coefficient
55%
Monetary Poverty
Survivorship in the Colombian retail industry will be tied to
strong investments (expenses) in experiential branding and
ecommerce. As the world’s retail arena is focusing on
delivering experiences instead of just goods and services, in
Colombia the increased competition and internationalization
of the market is allowing consumers to demand more value for
money not only in terms of pricing but in both shopping
experience and the level of comfort that a store offers.
According to BrandStrat more than 60% of Colombians decide
what to buy when they are already inside the store, but as the
socioeconomic conditions improve the buyers look for
emotional benefits instead of functional benefits.
Source: National Statistics Department
We believe that the industry players are going to make heavy investments in order to fulfill those requirements so it is
highly probable that Grupo-Exito’s investments in intangibles and marketing for the Omni-channel concept should
continue being sound throughout the following years, obviously this trend will translate in low FCFF in early years but it
will eventually improve as investments proceeds are realized.
DOMINANCE IN COLOMBIA : A STEEP HILL
We expect Grupo-Exito will remain the prevailing retailer in Colombia after developing a sound multi-staged/
multichanneled strategy. However, we believe the required investments would be more than US$250 million per year.
For example, positioning Grupo-Exito as an undisputable leader of the discount format in Colombia will require
investments in both logistics and marketing due to the noticeable differences in customer preferences throughout
Colombia, the company might as well make strategic alliances that will allow it to make use of well positioned brands. Non
orthodox alliances such as the resulting with ‘Comercializadora Giraldo Gómez y Cía’ for the operation of SuperInter
throughout 5 years -a soft discounter with COP 800 billion sales per year (US$400 million)- will help Grupo-Exito boost its
sales and the agreement (if approved by the Colombian consumer watchdog) will be an absolute masterstroke in terms of
marketing as Grupo-Exito would be able to leverage its sales with the well recognized SuperInter private label. The
required investment in 2014 would be more than COP 200 billion (US$102 million) plus a percentage-sales agreement for
the ownership of 19 stores and a call option exercisable in 2015 for 31 stores that would probably demand more cashflows. (See more details in ‘Grupo Exito -SuperInter: Letter-of-Intent’s summary).
Even though we acknowledge that Grupo-Exito has achieved leadership in almost every single market in which its
brands operate, maintaining competitiveness in Colombia will not be possible without strong investments in its
multichannel strategy, its real estate segment and the Omni-channel concept. We expect this strategy to impose a cap
on free cash flow to the firm (FCFF) as the company will need to (1) continue spending cash in strategic acquisitions of
intangibles and/or in savvy partnerships or alliances, (2) invest in retail properties so as to explain 20% of total EBIT with
its real estate segment; and (3) strengthen its omni-channel concept to anticipate any possible move that an international
ecommerce player (i.e. Amazon) could make in Colombia. In summary, nearly half of cash from operations will be
invested throughout the following years to achieve sustainability.
RETURN ON INVESTED CAPITAL IS LOW, BUT IT WILL RISE SO AS TO MATCH COST OF CAPITAL
Positive momentum in operating margins will continue in the near future, although the current stock price already
takes it into account. For us, Grupo-Exito’s ebit margin (FY13=5.1%) and ebitda margin (FY13=8.7%) are the harvest of a
sound multichannel retailing combined with an excellent marketing strategy through its 3 top-of-mind brands (Carulla,
Exito and Surtimax). Moreover a rock solid brand such as EXITO (7th most valuable in Colombia according to Brandz) and
the ownership of more than 30 private labels - food (11), clothing (16), entertainment (4) and personal care (1)-. imposes
a costly barrier of entry for competitors, particularly in the discount market, not to mention that Grupo-Exito operates
logistic network of 15 locations with 80% centralization.
Table 4. Profitability and Asset Turnover: Drivers of Return On Invested Capital (ROIC)
2011
1.08x
4.79%
8.4%
9.2%
Asset Turnover
EBIT Margin
EBITDA Margin
ROIC
2012
1.02x
4.83%
8.4%
8.0%
2013
1.0x
5.1%
8.7%
8.1%
2014 E
1.1x
4.7%
8.8%
8.1%
2015 E
1.2x
5.3%
9.0%
8.0%
2016 E
1.3x
6.1%
9.2%
9.0%
2020 E
1.5x
6.8%
9.8%
11.6%
2024 E
1.6x
7.3%
10.0%
15.2%
Source: Grupo-Exito—Serfinco
GRUPO-EXITOS’S STRATEGY WILL BOOST ROIC AND WE BELIEVE IT IS THE RIGHT PATH BUT...
We believe that strategic acquisitions, investments in the real estate segment, a continuous optimization of working capital
and a customer centric relationship will lead to 10 years of improvements in (1) asset turnover (+60%), (2) both EBIT margin
(+220bps) and EBITDA margin (+130bps), and (3) return on invested capital (+700bps). However, the current stock price does
not takes into account that Grupo-Exito’s strategy is not for free. Also, most of the FCFF for the company will be found after
2018 (not soon) and the stock is not a dividend play. According to the company, dividends were not increased in 2014 due
company’s intentions to make further strategic acquisitions without depending on capital market condition, so dividend
protection at current prices is not huge and discounted dividends models do not lead to higher valuations than a FCFF model or a
market based valuation.
Figure 9. Operating Indicators
120%
Informal market
67%
58%
52%
44%
40%
33%
42%
48%
Brasil
Colombia
56%
36%
64%
0%
Argentina
$ 1,110
$ 939
$ 782
$ 619
2024 E
2023 E
2022 E
2021 E
2020 E
$-
INFORMAL MARKET: ALLY WITH THEM, HELP THEM BE
SUSTAINABLE AND BOOST YOUR BRAND!!!
Formal market
100%
80%
$ 200
Source: Serfinco Estimations
Figure 11. Retail Market Structure in Colombia
20%
0%
2019 E
2024 E
2023 E
2022 E
2021 E
2020 E
2019 E
2018 E
2017 E
2016 E
2015 E
2014 E
2013
2012
Source: Serfinco Estimations
60%
6%
4%
2011
0%
2%
2018 E
8.1%
8%
6.44% $ 400
4.15%
4%
2017 E
8.1%
6%
$ 437
3% 9.2%
$ 600
6.41%
2016 E
10.5%
2%
8.13%
2015 E
10%
$ 1,000
$ 800
10%
$ 420
5%
12.33%
8%
7.3% 12%
5.1% 4.7%
4.8%
16%
14%
6.5%
8%
6%
15.2%
15.16% $ 1,200
12%
2014 E
8.8%
14%
2013
8.7%
8.4%
18%
$ 283
9%
10.0%
9.5%
NOPAT (right axis)
Return On average Assets
Return On Invested Capital
Return On average Equity
16%
2012
11%
ROIC
COP billion
EBIT margin
2011
EBITDA margin
Figure 10. Net Operating Profit After Taxes vs. ROIC
Mexico
Source: AVC Nielsen Dic, 2011
Chile
Grupo-Exito faced the fact that the informal market (i.e. small
independent stores) around the world have been standing up
for its market share using competitive advantages such as
convenience, local appeal and the possibility of having a
personal relationship (they could be thought even as
community centers). Fighting against the informal market is
very expensive as it is usually done with low prices and
consistency in the marketing proposal. How to tackle informalmarket’s resilience?: Ally with them and help them sell your
private label low-end portfolio.
A) SurtiMAX: Where You Buy For Less
SurtiMAX offers a convenience service for
the low end income bracket of the
Colombian socioeconomic pyramid, it is a
legacy of the 2007’s Carulla-Vivero
acquisition. The initial owners of the
company started in Bogotá by 1992 and
since then it has opened 146 stores.
Figure 12. Sample of a SurtiMAX’s Ally
SurtiMAX format has an everyday low price
strategy (EDLP) which is characterized for
requiring low CapEx but also offers low
BEFORE AND AFTER
operating margins. For us, more than a
Source: Grupo-Exito
banner to boost sales and acquiring
customers, the play is through the private label portfolio penetration into a highly fragmented market that requires a
specialized customer service. The private label penetration is targeted to be close to 29% of SurtiMAX’s total sales, while
for EXITO is 15% and for 8% for Carulla.
Figure 13. SurtiMAX: A Discount Convenience Store
Surtimax “El Socorro” and “El Descuento” in Bogotá. Source Grupo-Exito
SurtiMAX Aliados is a collaboration agreement that gives the owners of Colombian minimarkets the opportunity to
develop business with Grupo-Exito. As of December 2013, there where 269 Aliados Surtimax (according to the company,
1000 more are in the process of joining the program). The agreement involves SurtiMAX taking care of logistics and
distributions of its private labels while it helps the store owner with (1) a shop sign which identifies the ally, (2) outside
lights, (3) tent and (4) signboards.
This “experiment” should not be taken as significant part of SurtiMAX operations but as a real opportunity to boost the
private-label portfolio and it could be a first step to create a significant barrier of entry for international players, at least
in Bogotá.
B) SuperInter: Freshen UP!
3.
25,000
15.66%
12.54%
11.56%
20,000
20%
15%
9.90%
10%
15,000
7.56%
4.54%
5%
$ 28,388
$ 20,593
$ 13,431
$ 11,934
$ 10,697
4.57%
$ 7,125
10,000
5,000
7.78%
0%
Source: Serfinco
2024 E
2023 E
2022 E
2021 E
2020 E
2019 E
2018 E
2017 E
2016 E
2013
2012
2011
2010
-5%
2009
2015 E
Managing fresh categories in the discount market
Make use of a strong private label portfolio in geographic zone
Learn how to negotiate directly with local producers and farmers
Includes expected effect of
SuperInter agreement on total
sales
17.77%
2014 E
1.
2.
30,000
2008
All the agreements will allow Grupo-Exito’s to boost it sales and
we believe it is a masterstroke in terms of marketing as it will
allow Grupo-Exito to acquire synergies related to:
Figure 14. Grupo-Exito Sales CAGR = 9.28%
COP billion
SuperInter Agreement Will Lead To A Significant Increase In
Grupo-Exito’s Sales: By February 8, 2014, Grupo-Exito made
public a Letter of Intent presented to the company
Comercializadora Giraldo Gómez y Cía S.A. (”Comercializadora”) in
which it signed four agreements basically focused on SuperInter
(its main brand). The agreements are subject to the non objection
of the Colombian competition authority (see table 5).
Table 5. Grupo-Exito—SuperInter: Letter-of-Intent’s summary
AGREEMENT
BENEFIT
COST
A) Acquisition
Ownership of 19 stores
COP 200 billion (US$102 million)
B) Operating
agreement
5 years of sales of 31 business establishment
COP 10 billion per year (US$5.1
million per year)
C) License
agreement
Use of SuperInter Brands
2% of net sales of the business
establishments that use the
licensed brands
D) Option Call
Subjacent: 31 business establishments of A and the
Not indicated
brands indicated C.
Table 6. Total Estimated Costs Would Add Up To US$ 340 million (exercise)
RANGE IN COP BILLION
306
340
ESTIMATED UNDISCOUNTED COST OF A+ B+ C
ESTIMATED UNDISCOUNTED CASHFLOW REQUIRED FOR EXCERSICING
326
326
D
632
666
TOTAL ESTIMATED UNDISCOUNTED CASHFLOW
Assuming sales of about COP
900 billion per year, the total
cost for the licence agreement would be something
between COP 7 billion and
COP 18 billion per year, depending on the number of
establishments that use the
licenced brands
RANGE IN US$ MILLION
156
173
166
323
166
340
ASSUMPTIONS:
1) PRICE PER STORE PAID UNDER (A) WILL REMAIN THE SAME FOR BUYING ALL 31 ESTABLISHMENTS INDICATED IN THE OPTION CALL (D)
2) EXCHANGE RATE = 1960 COP/USD
3) BRANDS INDICATED IN (C) are not taken into account for the option call exercise
Source: Serfinco Estimates
SuperInter’s Description
SuperInter is the biggest ‘small independent store’ in Colombia, it ranks sixth in terms of market share with a 3.7% of
participation rate or US$425 million yearly sales. Its sales mixture is 100% food and it overweighs fresh products. The most
significant sales are 25% fresh meat, 10% fruits/vegetables and 10% grains. We estimate that total undiscounted costs for
the acquisition would add up to US$340 million (table 6)
As SurtiMAX, SuperInter also has an every day low price strategy (EDLP) and a strong private label portfolio that
represents nearly 20% of it sales. We believe this transaction will allow Grupo-Exito to impose as an indisputable market
leader in the discount market; however we prefer to wait and see for the net impact in NOPAT and EBIT margins as
public figures of SuperInter point to a 0.65% EBIT margin in 2012 (Grupo-Exito EBIT margin was 4.8% in 2012). In other
words, even though CapEx is low and it will boost sales by 6-8%, total Grupo-Exito’s Return On Invested Capital (ROIC)
should not increase by this transaction in the short term.
FIGURE 15. SuperInter Expertise: Fresh Products
SuperInter Armenia Plaza and Guayacanes. Source: SuperInter and Serfinco
INVESTMENT THESIS WRAP-UP:
Adaptability to a new customer in an environment full of fast-moving, unpredictable and reactive competitors is required
to be sustainable (survive?) and remain as a dominant company at least in Colombia. We believe Grupo-Exito’s strategy,
based on the real estate segment and in the Omni-Channel concept, will be a ROIC booster, although it will not be
reflected on FCFF as fast as it is implicit in current stock prices. While real estate segment will be a long-term ROIC driver
and is one of the main reasons we foresee improving EBITDA margins (see page 14), fast sales of Grupo-Exito’s private
label low-end portfolio will arise from the irruption of the Mom-and-Pop’s market share via SurtiMAX and SuperInter, even
though both low room for improvements in working capital management and thin EBIT margins imposes a cap for it. For
us, Grupo-Exito has a sound strategy and its a great story for exposing to the Colombian retail industry, but we prefer
lower price levels to rate it as a ‘buy’.
POSITIVE CATALYSTS
Figure 16. Cash Conversion Cycle (Net Operating Cycle)
(+) Days of Inventory on Hand
(-) # of Days of other Payables
Cash conversion cycle (net operating cycle)
95.0
52
45.0
68
69
51
51
61
43
19
-5.0
18
15
20.0
11
6
14
13
-69
+50
17
17
16
14
(+) Days of Sales Outstanding
(-) # of Days of Suppliers
80
67
64 58
70.0
-17
13
13
+13
2
-10
-30.0
-22
-21
= -23
2023 E
2021 E
2019 E
2015 E
2011
2013
-55.0
2017 E
-33
2009
Throughout the last decade Grupo-Exito has proved us
that it was able to improve its inventory management
system almost every single year and also that it was
capable of using suppliers money for up to 80 days.
However, we do not expect further improvements in
net operating cycle as the retail arena is turning more
into “local fresh-products” and the power of suppliers
could increase when you need to compete with a
“value-for-money strategy”. Further working capital
squeezes would force us to change our baseline
scenario to a more positive one. Consolidation of the
agreement with SuperInter (specialist in fresh
products) would be a first test for our model.
2007
Free-Up of Working Capital Arising from SuperInter
Source: Serfinco Estimates (365 day count convention)
Potential Increase in Extraordinary Dividends or a Stock Buyback
As of December 2013, Grupo-Exito reported COP 2.7 trillion (US$ 1.4 billion) worth of cash and marketable securities. Most
of that money was obtained from the secondary public offering made in 2011 and it is intended to be used for ‘earningsaccretive’ acquisitions. Even though we already include in our valuation the value of that cash and the risk reduction
associated to having cash on hand, an extraordinary dividend or a stock buyback would improve cost of capital, increase
ROIC rapidly and reduce all the agency costs faced when that amount of money is held in a low growth industry.
Cost-Synergies Motivated Acquisition
Even though creating a sound brand in the mind of customers is the best way to create value, it could take time and
resources to develop it internally. Another acquisition focused on a recognized brand (e.g. SuperInter’s private label
portfolio) or software/marketplace development (e.g. Cdiscount) able to generate value in the very short run would boost
ROIC at a faster pace than expected for us.
Unexpected Ramp Up In Domestic Demand
We expect 11.56% Y/Y growth in 2014’ sales if SuperInter sales are accounted after mid June 2014. On a SSS basis we expect
a 7.66% Y/Y growth. A boost in sales arising from an unexpected ramp up in domestic demand (i.e. retail sales ex-gas &
vehicles growing faster than a 8% Y/Y) would be a catalyst for increasing our target price.
NEGATIVE CATALYSTS
 An Objection to the SuperInter Transaction
As SuperInter transaction depends on the Consumer-watchdog’s non-objection, delays or restrictions on the transaction
or any related anti-trust measure would be negative in terms of both revenues and ROIC in our model. It Is worth noting
that Grupo-Exito’s market share is currently in the 40%-50% range taking into account only traditional stores, but it drops to
a 20%-25% when the informal market is included (direct competition of the discount channel), so an objection is not part of
our base scenario.
 A Call Option Exercised Under Abnormal Market Conditions
10%
UYU/COP (left axis)
URUGUAYAN CPI YoY
Cross crncy Trend
110
105
9%
100
8%
95
90
7%
85
Source: Bloomberg and Serfinco Estimates
02/14
08/13
02/13
08/12
02/12
08/11
02/11
08/10
02/10
6%
08/09
80
02/09
Devaluation and persistent inflation in Uruguay can hurt the
consolidated income statement and the value of Disco and
Devoto. Current inflation levels in Uruguay are close to 10% Y/Y.
115
08/08
 UYU/COP devaluation
Figure 17. UYU/COP Exchange Rate
02/08
Grupo-Exito has a call option for Disco and Devoto in which
Exito could acquire up to 29% of Disco and 3.5% of Devoto from
Casino Groupe. According to a 2010 statement, this option can
be exercised any time before 2021 and the cash outflow would
be close to EUR 70 million. We do not include this outflow in
our model.
VALUATION
Our 2014YE target price of COP 27,200 per share is supported by a discounted free cash flow to the firm model (FCFF) that
includes profitability improvements arising from (1) a hike in asset turnover from 1.1x to 1.6x driven by Grupo-Exito’s
retail business marketing strategy (sales will grow faster than assets required to produce them), (2) improvements in both
EBIT and EBITDA margins resulting from an increasing weigh of real estate segment and a slight optimization of inventory
management system and (3) a capital structure that will allow the company to reduce cost of capital while giving back
cash to stockholders either via dividends or a buyback (see next page).
Important assumptions: → Sales arising from SuperInter’s agreement are accounted starting from 2H2014.
→ Terminal value arises from an H-model that goes gradually from a 9% growth of EBIT
in 2024 to a 5% through 5 years. The result is similar to a 8.3x EV/EBITDA multiple.
Table 7. FCFF Valuation
Figure 18. FCFF Breakdown
Operating tax
CapEx, Acquisitions and Leasehold improvements
Wk Investments
EBITDA
FCFF
3,300
2,800
P$ billion
2,300
1,800
1,300
800
Ammunition for
rapid acquisitions
or a stock buyback
300
-200
2024 E
2023 E
2022 E
2021 E
2020 E
2019 E
2018 E
2017 E
2016 E
2015 E
2014 E
2013
2012
2011
-700
Source: Serfinco
Source: Serfinco
Table 8. ROaE Decomposition
Asset Turnover
EBIT margin
EBITDA margin
Non-Operating Burden
Tax Burden
Net Margin
Financial Leverage
RoAE
2013
1.0x
5.1%
8.7%
100.6%
80.0%
4.10%
1.4x
5.7%
2014 E
1.1x
4.7%
8.8%
91.2%
78.1%
3.34%
1.4x
5.0%
2015 E
1.2x
5.3%
9.0%
95.3%
72.1%
3.67%
1.4x
6.1%
2016 E
1.3x
6.1%
9.2%
90.8%
68.6%
3.81%
1.5x
7.1%
2017 E
1.3x
6.5%
9.4%
88.4%
68.6%
3.97%
1.6x
8.2%
2018 E
1.3x
6.7%
9.5%
85.4%
67.0%
3.81%
1.7x
8.3%
2019 E
1.4x
6.8%
9.7%
84.5%
67.0%
3.83%
1.7x
8.8%
2020 E
1.5x
6.8%
9.8%
85.4%
67.0%
3.90%
1.7x
9.7%
2021 E
1.5x
6.8%
9.8%
83.5%
67.0%
3.82%
1.8x
10.4%
2022 E
1.5x
6.8%
9.9%
81.0%
67.0%
3.70%
1.9x
10.9%
2023 E
1.6x
7.2%
10.0%
80.5%
67.0%
3.87%
2.0x
12.3%
Source: Serfinco
Table 9. Sustainable Growth Rate of EBIT
Sustainable Growth Rate of EBIT (G)
Long term ROIC
Reinvestment Rate
Long term Inflation
Table 10. Implicit Exit EBITDA Multiple
5.0%
15.2%
12.5%
3.0%
EXIT VALUE (EV / EBITDA)
E [ EBITDA 2024 ] (COP million)
TERMINAL VALUE million (Cop million)
8.3X
2,850,605
23,773,817
Source: Serfinco
Source: Serfinco
Table 11. Sensitivity to WACC and Growth Rate
NOMINAL WACC*
Sustainable growth of EBIT ( Nominal G)
-75 bps
-50 bps
-25 bps
0 bps
25 bps
50 bps
75 bps
4.2%
4.45%
4.70%
5.0%
5.2%
5.5%
5.7%
+150 bps
12.4%
+100 bps
11.9%
20,400
21,800
20,700
22,200
21,000
22,600
21,300
23,000
21,700
23,400
22,100
23,900
22,500
24,400
+91 bps
11.8%
23,500
23,900
24,400
24,900
25,500
26,000
26,700
0 bps
10.9%
25,400
26,000
26,600
27,200
27,800
28,600
29,400
-50 bps
10.4%
27,700
28,400
29,100
29,900
30,700
31,700
32,700
-100 bps
9.9%
30,400
31,200
32,100
33,100
34,300
35,500
36,900
35,700
37,000
38,400
40,000
41,800
43,800
34,600
* Average WACC over the forecast horizon
-163 bps
9.3%
Source: Serfinco
2024 E
1.6x
7.3%
10.0%
80.9%
67.0%
3.94%
2.1x
13.4%
CAPITAL STRUCTURE ASSUMPTIONS
Even though almost 100% of Grupo-Exito’s operations are being financed by shareholders (it has virtually zero debt), the
current return on invested capital (ROIC) of the company is very low (2013’S ROIC = 8.13%) similar to the return seen on
local fixed income securities (COLTES2024’s average ytm=6.6% for the last twelve months). We expect that ROIC increases
arising from improvements in operations will bounce throughout 2018-2024, however earlier ROIC figures will remain soft
due to the lack of a tax shield and because of the low return that fixed income securities are yielding (cash excesses are
usually invested in short-term fixed income securities).
Using cash in (1) CapEx, (2) acquisitions, (3) leasehold improvements, (4) computer software, and (5) a higher dividend
payout ratio or increasing debt will reduce WACC in our model.
It is worth noting that we took into account the total effect (benefits and costs) of high levels of cash in the short run in our
valuation via WACC:
1)
2)
3)
Having no debt in 2014 benefits the company in the short run as it reduces the bankruptcy probability and opens
opportunities for rapid acquisitions (i.e. levered beta is close to the unlevered beta but then it increases as a function
of debt).
Effective tax rate has been increasing in Colombia due to tax reforms, no debt means higher WACC because the cost of
debt is lower than the opportunity cost of giving money away to the government instead of returning capital to
shareholders and paying interests.
Having a significant amount of cash increases the probability of a stock buyback, but reduces ROIC in the short term.
Table 12. Debt and Dividend Sustainability
Net Debt / EBITDA
Interest Coverage Ratio
Dividend per share (COP)
Payout Ratio
2013
-2.68x
6.66x
531
54.2%
2014 E
-1.46x
6.83x
578
65.0%
2015 E
-0.99x
17.28x
661
60.0%
2016 E
-0.39x
11.31x
753
60.0%
2017 E
-0.35x
7.40x
873
61.0%
2018 E
-0.26x
6.92x
1000
67.0%
2019 E
-0.09x
8.59x
1137
70.0%
2020 E
0.01x
8.88x
1273
71.0%
2019 E
85.6%
14.4%
-2.0%
0.91
0.82
4.6%
2.7%
1.8%
8.61%
3.32%
12.2%
8.98%
11.3%
11.1%
2020 E
81.5%
18.5%
0.2%
0.94
0.82
4.6%
2.7%
1.8%
8.76%
3.32%
12.4%
8.98%
11.2%
11.6%
2021 E
0.11x
7.14x
1412
74.0%
2022 E
0.23x
6.24x
1547
77.0%
2023 E
0.30x
6.53x
1777
78.0%
2024 E
0.31x
6.47x
1973
79.0%
Source: Serfinco
Table 13. WACC Assumptions vs. ROIC Outcome
Variable
E/E+D
D/E+D
Net Debt /Capital
Levered Beta
Unlevered Beta
Risk Premium
Risk Free Rate
Country Risk
ke (USD)
Devaluation LT
Ke (COP)
Marginal Kd (COP)
WACC (COP)
ROIC (COP)
Source: Serfinco
2013
96.9%
3.1%
-46.7%
0.74
0.73
4.6%
2.7%
1.8%
7.84%
3.3%
11.4%
9.32%
11.3%
8.1%
2014 E
95.3%
4.7%
-23.8%
0.84
0.82
4.6%
2.7%
1.8%
8.31%
3.32%
11.9%
8.80%
11.6%
8.1%
2015 E
94.4%
5.6%
-17.5%
0.85
0.82
4.6%
2.7%
1.8%
8.34%
3.32%
11.9%
9.19%
11.6%
8.0%
2016 E
86.9%
13.1%
-7.4%
0.90
0.82
4.6%
2.7%
1.8%
8.57%
3.32%
12.2%
9.51%
11.4%
9.0%
2017 E
81.8%
18.2%
-7.1%
0.94
0.82
4.6%
2.7%
1.8%
8.75%
3.32%
12.4%
9.30%
11.2%
10.1%
2018 E
82.9%
17.1%
-5.7%
0.93
0.82
4.6%
2.7%
1.8%
8.71%
3.32%
12.3%
9.09%
11.3%
10.5%
2021 E
76.5%
23.5%
3.0%
0.99
0.82
4.6%
2.7%
1.8%
8.97%
3.32%
12.6%
9.09%
11.1%
12.4%
2022 E
73.7%
26.3%
6.2%
1.01
0.82
4.6%
2.7%
1.8%
9.09%
3.32%
12.7%
9.03%
11.0%
13.1%
2023 E
73.4%
26.6%
8.7%
1.02
0.82
4.6%
2.7%
1.8%
9.11%
3.32%
12.7%
9.02%
10.9%
14.5%
2024 E
70.4%
29.6%
9.6%
1.05
0.82
4.6%
2.7%
1.8%
9.25%
3.32%
12.9%
8.88%
10.8%
15.2%
Table 14. 2013-2024 CAGR of Dividends = 11.61%
COP billion
Financial Liabilities
Cash & Equivalents
Net Financial Liabs
Equity
Total Dividends paid
Growth rate of dividends
2013
252
2,754
(2,502)
7,861
238
2014 E
390
1,924
(1,534)
7,977
238
0.0%
2015 E
479
1,687
(1,207)
8,103
259
8.9%
2016 E
1,160
1,695
(534)
7,722
296
14.4%
2017 E
1,777
2,304
(527)
7,972
337
13.9%
2018 E
1,691
2,131
(441)
8,193
391
16.0%
2019 E
1,381
1,546
(165)
8,239
448
14.5%
2020 E
1,866
1,848
18
8,244
509
13.7%
2021 E
2,529
2,276
253
8,219
570
11.9%
2022 E
2,932
2,385
547
8,216
632
11.0%
2023 E
3,020
2,223
797
8,324
693
9.6%
2024 E
3,536
2,642
894
8,422
795
14.9%
Source: Serfinco
Figure 19. Solvency Ratios
Net Debt / EBITDA
Uses of Cash Flows:
20x
15x
10x
6.5x 5x
0.3x
0x
2024 E
-5x
2023 E
2022 E
2021 E
2020 E
2019 E
2018 E
2017 E
2016 E
2015 E
2014 E
2013 E
2012
2011
Interest coverage ratio
1,500
1,000
17.3x
500
11.3x
0
-500
7.4x
8.9x
-1,000
8.6x
6.8x
-1,500
6.7x
3.5x
-2,000
-0.3x
-2,500
-2.7x
-2.6x
-3,000
2010
P$ billon
Net Financial Debt (left axis)
Increases in net debt (financial liabilities — cash & equivalents)
will be used in:
→ Capital investments (fixed assets and brand intangibles)
→ Acquisitions (fixed assets and brand intangibles)
→ Leasehold improvements and computer software
→ Increases in dividend payment (payout ratio)
Net-debt-to-EBITDA will not be higher than 0.3x, which should
not be considered a high level and it is usually in line with a AAA
rating.
Source: Serfinco
COMPARABLE COMPANIES ANALYSIS
The odds are against higher stock prices in the short term as upside potential is limited for FCFF and earnings multiples
are currently at high levels. Grupo-Exito’s trailing multiples (last-twelve-months) might point to an upside when compared
by operating standards (EV/EBITDA Grupo-Exito=11.6x vs. PEERS=12.4x), albeit the bottom line has been weak and the
stock is still trading at high levels vs. earnings (Trailing P/E Grupo-Exito=30.6x vs. PEERS=23.8x). While we believe that
Grupo-Exito will continue increasing turnovers and EBITDA margins (which supports a high EBITDA multiple), we do not
expect huge improvements neither in net income nor in free cash flows not only as a result of a heavy CapEx for 2014
(guidance points to something close to US$250 million), but also due to a +20% effective tax rate that is here to stay and
further working capital optimization is highly improbable as current cash conversion cycle is already in good levels (-33
days according to our numbers). In other words, it would be difficult to justify a higher than peer’s P/E for Grupo-Exito.
Table 15. Price and Enterprise Value Multiples
P/E
11.6x
10.2x
14.5x
14.8x
8.6x
14.4x
20.6x
10.4x
12.4x
14.4x
7.0%
11,538
252
2,754
137
14
14,163
31,642
27,491
30.6x
26.9x
27.4x
16.5x
26.3x
26.0x
25.7x
22.7x
23.8x
26.0x
-22.1%
Market Value
(US$ million)
6,953
5,636
45,104
4,536
12,528
14,416
21,377
9,712
Figure 20. Retail Industry Median
34.0x
EXITO
32.0x
WALMEX
30.0x
SORIANA
28.0x
FALABELLA
26.0x
P/ E
ALMACENES EXITO
SORIANA-B
WALMEX
COMERCI
PAO ACUCA-PREF
EL PUERTO DE LIVERPOOL
FALABELLA
CENCOSUD SA
Harmonic mean ex EXITO
Industry Median
Upside vs Harmonic Mean
Enterprise Value
- Long term debt and notes
+ Cash & Equivalents
+ Equity and LT Investments
- Minority Interest
Equity Value
Price Per Share
Average
EV/EBITDA
Pao de Acúcar
24.0x
LIVERPOOL
22.0x
Cencosud
20.0x
18.0x
COMERCI
16.0x
23,340
14.0x
0.0x
3.6x
7.2x
10.8x
14.4x
EV / EBITDA
Source: Bloomberg, Capital IQ and Serfinco estimates on a trailing last-twelve-months basis. Calculated with information available on April 16th
18.0x
21.6x
25.2x
RECOMMENDATION
Figure 21. Grupo-Exito recommendation
Grupo-Exito
Date
21-Apr-14
38,000
36,000
34,000
32,000
30,000
27,200
28,000
26,000
24,000
22,000
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Jan-14
Mar-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
20,000
Recommendation
SELL
T.P.
$27,200
COMPANY DESCRIPTION
GRUPO-EXITO MAIN BRANDS
The value proposition for Grupo-Exito’s retail business is supported in segmented brands that cover all socioeconomic levels
of Colombia and the high-end income bracket in Uruguay. In our investment thesis we described the “Soft Discount
Proposition” of SurtiMax and SuperInter as they partly support our investment thesis idea of a required sustainability. The
following banners are the ADN of the company and represent most of company’s revenues.
EXITO
Is the main brand of the Group with 237 stores as of December, 2013. It is
focused on the Colombian middle income bracket with 3 formats:
hypermarkets (88), supermarkets (77), and convenience stores (74). Its
market share is close to 40% in Colombia.
Figure 22. Exito Strategy
Source: Grupo-Exito
CARULLA
Born in Bogotá by 1905, it has become the leading store in premium
products & services in Colombia. It ranks 4th in terms of market share with a
(7%) after Exito, Cencosud and Olimpica.
Figure 23. Carulla Strategy
Source: Grupo-Exito
SURTIMAX
SurtiMAX offers a convenience service for the low end income bracket of
the Colombian socioeconomic pyramid, it is a legacy of the 2007’s CarullaVivero acquisition. The initial owners of the company started in Bogotá by
1992 and since then it has opened 146 stores.
DISCO
Disco, is the country’s top mass retailer, with a multiformat network
comprised of three banners: Disco, Devoto and Géant. Disco (the brand)
currently has 28 stores located in Montevideo and Punta del Este under
supermarket format (24) and (4) convenience stores. It offers a delivery
service “Disco Express”, counts with several office spaces inside the
supermarkets where several companies offer their services, photography,
printing, financial services and a line of ATMs.
Figure 24. SurtiMAX Strategy
Source: Grupo-Exito
Figure 24. Brands in Uruguay
GÉANT
GÉANT stores are the first outcome of the joint venture between Disco and
the Casino Group made in 1997. The first Geant works under the
hypermarket format. And it is built inside a 24,000 m2 commercial roof
covered compound, out which 16,000 m2 are covered by the hypermarket
(with 64 cash registers). The second store “Nuevo Centro” was opened by
2013 with a supermarket format. Amongst the services offered by the
hypermarket we highlight, deliveries 48 hours after ordering (including
appliances, TVs, Audios systems and computers), aside from sending sales
offers to the entire country, looking to cover most of it.
DEVOTO
The chain counts with 23 supermarkets and a hypermarket. It is located in
Montevideo (16), Maldonado (3) and Canelones (4). Devoto has a strong
loyalty program through the card “hipercard” and has other complementary
business. DEVOTO, just like Disco, adopted the “Fresh Market” concept.
Source: Disco — Geant—Devoto
COMPLEMENTARY BUSINESSES
Grupo-Exito has six complementary businesses leveraged on customer traffic: (1) real estate development, (2) insurance,
(3) financial retail, (4) travel agencies, (5) mobile virtual operator and (6) international money transfer services. These
segments are able to take advantage of customers that Grupo-Exito’s retail stores attract in order to maximize the returns
from their property portfolios by leasing exceptional locations to commercial partners. The most significant business are
those arising from real estate developments and financial retail, other business could be more important in the future
but today are immaterial when compared to the retail segment.
Real Estate Developments
Grupo-Exito has developed 11 shopping malls in mid sized cities enhancing its presence in the shopping malls business.
As of December 2013, Grupo-Exito had more than 214k sqm leased that made up to 16.8% of EBIT. For the near future,
the company expects to build 4 new shopping centers in a 51%/49% partnership with companies such as SITUM (Grupo
Argos) which would reduce Grupo-Exitos’ initial outlay in the projects. We expect real estate segment to be a ROIC driver
and we forecast Return On Invested Capital arising from real estate developments to be close to 18% with EBITDA
margins in the 23%-28% range. However, it is difficult to foresee a specific internal rate of return or estimate a NPV
profile for each property as Grupo-Exito neither breaks down financial statements by segments nor gives guidance for
each-projects’ net operating income (NOI).
Figure 25. Real Estate Projects 2014-2018
● Expected Total Gross Leasable Area → 101k sqm
● 2014 Openings
→ 51k sqm in Neiva, Villavicencio and the so called Vizcaya Business Center
in Medellín
San Pedro Plaza Neiva (2014)
Viva Viallavicencio(2014)
Viva Barranquilla (2016)
Vizcaya Business Center (2014)
Financial Retail and Insurance
With more than 1.7 million outstanding cards, Grupo-Exito in JV with Bancolombia is the third credit card issuer in
Colombia. The investment vehicle is an SPE called Tuya S.A. capitalized by Bancolombia (equity) and through
Subordinated bonds bought by Exito and Alkosto S.A. (a wholesale retailer), the risk and rewards of the JV are split among
bondholders and Bancolombia. As of December 2013, Tuya S.A. had a AAA rating (Fitch) with a 2.3x PDL coverage ratio
and a 15.5% capital adequacy ratio.
Grupo-Exito Insurance business is a JV with Grupo Sura that offers a full insurance policy portfolio (life, education, market
and automotive, among others). Grupo-Exito has over 500,000 persons insured
OMNI-CHANNEL: Ecommerce + Mobile Applications + Virtual Catalogues & Aisles + Delivery point Services
Omni-channel is a corporate concept that leverages multi-channel retailing by focusing more on the consumer experience
regardless of the preferred channel (it could be thought as the evolution of multi-channel). This model combines the physical
and the virtual worlds, making the customer the center of a coordinated strategy in terms of operations, sales and marketing
and IT.
Multi-channel retailing usually focus on the costumer but the channels are not clearly coordinated so the buying experience
is enjoyed in a disordered way. The drawback is that consumers are not ‘traceable’ and are not able to enjoy a brand but a
channel (you used to feel a totally different customer when you bought through exito.com than when you bought in a brick
and mortar). Omni-channel retailing focus on a memorable and consistent customer experience regardless of the channel.
The cost: Higher budget for IT and for coordinating operations between marketing, sales and IT.
→ Cdiscount: The Ultimate Transfer to ‘Team Ecommerce’
Not only platforms such as Exito.com and Carulla.com are a sound offer but a new
online platform focusing on the broadest non-food variety of products arrived to
starting in Colombia: Cdiscount.
Figure 26. Team ecommerce
Cdiscount is a joint venture between Grupo-Exito (70%) and Casino Enterprise
(30%) in which the initial investment was US$10 million. The initiative leverages
Grupo-Exito offering (product, logistics and local market know-how) with the
delivery and service quality developed by Cdiscount in France (IT platform, online
marketing experience and industry know how).
Cdiscount is the ecommerce leader in France with more than EUR 1.6 billion
(including marketplace), for over 10 years it has successfully deployed its
multichannel approach and an innovative business model aimed to offer the
cheapest prices on the market.
Cdiscount-France’s business model relies upon a broad and diversified offer
together with a marketplace which successfully extends the product assortment of
the website with offers from merchant partners. This activity now represent 16% of
its business volume in France. Several synergies could arise from this joint venture,
for example new services such as the payment in stores and mobile applications
and websites, which are business as usual for Cdiscount in France, are being
adopted by Grupo-Exito in Bogotá.
→ Gemex O&W SA.S.: Catalogue and Direct Sales
Grupo-Exito invested COP 995 million (US$ 514k) for 85% of the Medellin based
company. The company sells household cleaning products under the brand Todo
Hogar.
THE AGREEMENT WITH SUPERINTER
1. A purchase-sale agreement whereby Grupo-Exito acquires ownership
over nineteen business establishments, for a total of COP 200 billion
(US$102 million)
2. A five-year operating agreement whereby Comercializadora grants
Grupo-Exito the right to operate thirty one (31) business establishments
owned by Comercializadora, for COP 10 billion per year (US$5.1 million
per year)
3. A five-year license agreement whereby Comercializadora grants the
use of its brands to Grupo-Exito in exchange for annual remuneration
payable starting on the second year of the agreement equivalent to 2% of
net sales of the business establishments that use the licensed brands,
and
4. An Option Call, whereby Comercializadra Grants Grupo-Exito an
option to acquire, in 2015 the thirty on (31) business establishments
mentioned in item ii. And the brands indicated in item 3.
Grupo-Exito’s expected geographic footprint . Source Grupo-Exito
CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE
Figure 27. Board of Directors Composition
Figure 28. Management Team
Source: Grupo-Exito
Source: Grupo-Exito
Board of Directors’ Composition:
It is composed of nine members elected by the General Meeting of Shareholders to hold office for a period of 2 years. At least three
members must be independent. The President of the Company is not, per se, a member of the Board of Directors, but must attend
all meetings of the board, with voice but no vote, and will receive no additional compensation for attending meetings. The
following members also hold management positions in Groupe Casino: Arnaud Strasser, Yves Desjacques, Philippe Alarcón and
Bernard Petit.
About Carlos Mario Giraldo Moreno (CEO):
Mr. Giraldo Moreno has been Grupo Exito’s Chief Executive Officer since March 2013 after 5 years as Chief Operating Officer. Prior
to joining the Company, Mr. Giraldo Moreno was the CFO of Negocio de Galletas and Commercial Executive VP of Grupo Chocolates
(Now Grupo Nutresa). Mr. Giraldo has a law degree from the Universidad Pontificia Bolivariana. He has also participated in an
excecutive program at the Kellog School of Management of Northwestern University and Strategic Planning Management in
Retailing at Babson College.
Figure 29. Ownership Structure
Adr Program;
3.0%
Other
Shareholders;
7.6%
International
Funds; 14.9%
Casino
Groupe;
54.8%
Colombian
Pension
Funds; 19.8%
Source: Grupo-Exito As of December 31, 2013
FINANCIAL STATMENTS
Table 16 . INCOME STATEMENT
Income Statement (COP million)
Revenue
Sales
Other operational revenue
Cost of goods
Gross Profit
2011
8,844,710
8,390,801
453,909
(6,610,665)
2,234,045
2012
10,229,673
9,705,414
524,259
(7,559,872)
2,669,801
2013
10,696,961
10,129,436
567,525
(7,854,807)
2,842,154
2014 E
11,933,947
11,300,794
633,153
(8,763,129)
3,170,818
2015 E
13,430,837
12,718,266
712,570
(9,854,241)
3,576,596
2016 E
14,760,977
13,977,836
783,141
(10,825,740)
3,935,237
2017 E
16,150,351
15,293,498
856,853
(11,839,865)
4,310,486
2018 E
17,549,019
16,617,959
931,059
(12,859,968)
4,689,051
2019 E
18,968,361
17,961,998
1,006,362
(13,894,375)
5,073,986
2024 E
28,387,588
26,881,491
1,506,097
(20,723,015)
7,664,573
Payroll and employ benefits
Other administrative and sales expenses
Depreciation and amortization
Total expenses
Operating income
EBITDA
Ebitda Margin
(669,037)
(822,024)
(319,662)
(1,810,723)
423,322
742,984
(878,621)
(932,455)
(364,558)
(2,175,634)
494,167
858,725
(928,540)
(981,588)
(387,438)
(2,297,566)
544,588
932,026
(1,025,000)
(1,092,354)
(494,403)
(2,611,758)
559,060
1,053,463
(1,153,567)
(1,208,410)
(496,332)
(2,858,309)
718,287
1,214,619
(1,267,812)
(1,310,963)
(454,606)
(3,033,381)
901,856
1,356,462
(1,387,145)
(1,413,095)
(454,017)
(3,254,256)
1,056,229
1,510,246
(1,507,276)
(1,511,011)
(503,258)
(3,521,545)
1,167,506
1,670,765
(1,629,182)
(1,605,840)
(555,382)
(3,790,404)
1,283,582
1,838,964
(2,438,194)
(2,375,774)
(786,854)
(5,600,822)
2,063,751
2,850,605
8.40%
8.39%
8.71%
8.83%
9.04%
9.19%
9.35%
9.52%
9.69%
10.04%
165,470
164,537
933
(165,324)
(157,771)
(7,553)
423,468
(566)
422,902
(33,447)
389,455
226,923
226,390
533
(160,118)
(139,972)
(20,146)
560,972
(2,118)
558,854
(83,549)
475,305
161,380
161,368
12
(156,272)
(81,807)
(74,465)
549,696
(1,872)
547,824
(109,417)
438,407
112,756
112,744
12
(160,387)
(81,807)
(78,580)
511,429
(1,742)
509,687
(111,557)
398,131
98,830
98,817
13
(130,342)
(41,569)
(88,773)
686,775
(2,339)
684,436
(191,090)
493,346
99,305
99,292
13
(179,707)
(79,727)
(99,980)
821,454
(2,797)
818,657
(256,959)
561,697
135,017
135,004
14
(253,978)
(142,828)
(111,150)
937,269
(3,192)
934,077
(293,187)
640,890
124,877
124,863
14
(291,889)
(168,611)
(123,279)
1,000,494
(3,407)
997,087
(329,039)
668,048
90,585
90,571
14
(285,256)
(149,357)
(135,899)
1,088,911
(3,708)
1,085,203
(358,117)
727,086
154,833
154,816
17
(544,287)
(318,814)
(225,473)
1,674,296
(5,702)
1,668,594
(550,636)
1,117,958
Non operating income
Financial income
Dividends
Non operating expenses
Financial expenses
Other net expenses and income
Income before taxes and minority interest
Minority interest
Income before taxes
Taxes
Net Income
Source: Grupo-Exito and Serfinco Estimates
Table 17. BALANCE SHEET
Assets (COP $ million)
Current Assets
Cash and cash equivalents
Time deposits & marketable sec
Receivables
Inventories
Prepaid expenses
Total current Assets
1,487,540
786,142
327,700
994,501
51,401
3,647,284
1,591,110
916,067
359,780
1,106,138
45,037
4,018,132
1,772,411
981,754
417,807
1,138,925
42,225
4,353,122
1,476,104
448,157
435,254
1,221,946
47,108
3,628,569
1,644,524
42,052
489,848
1,365,451
52,973
3,594,849
1,572,329
122,349
538,361
1,490,574
58,196
3,781,809
1,371,081
933,109
589,034
1,619,824
63,647
4,576,695
1,339,160
791,952
640,047
1,748,108
69,131
4,588,398
1,447,470
98,355
691,813
1,888,720
74,692
4,201,048
1,571,481
276,195
751,084
2,049,136
81,036
4,728,931
2,166,248
476,090
1,035,350
2,816,965
111,400
6,606,053
Long term debtors
Permanent investment
Property, plant & equipment
Intangible
Long term prepaid
Other assets
Total Apreciation
Total Long term assets
37,401
84,154
2,265,785
2,099,133
343,459
285
1,330,894
6,161,111
40,775
124,956
2,248,909
2,105,218
350,604
285
1,433,123
6,303,870
62,061
137,408
2,279,059
2,102,250
343,287
285
1,507,869
6,432,219
57,345
158,916
2,933,375
2,254,140
527,120
285
1,507,869
7,439,051
62,269
168,280
3,140,835
2,404,589
593,238
285
1,507,869
7,877,364
71,431
177,708
3,349,909
2,559,531
651,990
285
1,507,869
8,318,723
78,155
186,142
3,510,936
2,716,757
713,358
285
1,507,869
8,713,503
84,923
193,274
3,611,319
2,874,580
775,137
285
1,507,869
9,047,388
91,792
200,550
3,718,959
3,030,686
837,829
285
1,507,869
9,387,970
99,656
208,108
3,834,082
3,182,155
909,610
285
1,507,869
9,741,764
137,373
241,031
4,457,449
3,685,042
1,253,875
285
1,507,869
11,282,924
Total Assets
9,808,395
10,322,002
10,785,341
11,067,620
11,472,213
12,100,532
13,290,198
13,635,786
13,589,018
14,470,695
17,888,977
Liabilities
Current liabilities
Notes payable
Suppliers
Accounts payable
Taxes payable
Salaries and benefits payable
Provisions and estimated liabilities
Deferred charges, net
Bonds and commercial papers
Prepaid
Total Current liabilities
Non current liabilities
Taxes payable
Salaries and benefits payable
Provisions and estimated liabilities
Bonds and long term financial obligations
Prepaid
Others
Total long term liabilities
Total Debt
Minority Interest
2011
2011
2012
2012
2015 E
2016 E
2016 E
2017 E
2017 E
2018 E
2018 E
2019 E
2019 E
2020 E
2020 E
2024 E
2024 E
102,325
1,784,319
405,103
160,702
102,709
58,990
3,006
0
59,830
2,676,984
16,111
1,756,358
407,053
185,857
102,709
58,990
3,006
150,000
59,830
2,739,913
37,325
1,851,365
457,735
196,807
102,709
58,990
3,006
0
59,830
2,767,768
66,791
2,033,885
502,862
207,834
102,709
58,990
3,006
0
59,830
3,035,908
127,388
2,224,414
549,969
217,697
102,709
58,990
3,006
0
59,830
3,344,003
359,305
2,416,066
597,353
226,039
102,709
58,990
3,006
0
59,830
3,823,298
341,566
2,610,405
645,402
234,548
102,709
58,990
3,006
0
59,830
4,056,456
20,625
2,832,116
700,218
243,387
102,709
58,990
3,006
0
59,830
4,020,881
214,034
3,893,335
962,596
281,892
102,709
58,990
3,006
0
59,830
5,576,393
0
558
17,720
224,650
21,980
62,118
96,965
423,991
49,291
540
16,636
150,000
12,884
58,986
0
288,337
0
488
16,871
150,000
9,002
56,886
0
233,247
0
702
24,265
224,343
12,947
73,218
0
335,476
0
1,227
42,420
441,795
22,634
78,396
0
586,473
0
2,777
96,000
1,093,613
51,223
83,615
0
1,327,228
0
4,097
141,647
1,649,356
75,580
87,634
0
1,958,314
0
3,353
115,915
1,331,300
61,850
90,140
0
1,602,557
0
2,670
92,318
1,039,248
49,259
92,826
0
1,276,321
0
4,579
158,290
1,845,387
84,460
95,700
0
2,188,416
0
8,098
279,961
3,321,856
149,381
111,259
0
3,870,556
2,561,154
2,716,545
2,910,231
3,075,389
3,354,240
4,363,136
5,302,317
5,425,855
5,332,776
6,209,297
9,446,948
13,678
Total Equity
2012
4,482
4,826,441
779,481
127,797
475,305
3,508
1,374,765
7,591,779
Total Equity and liabilities
9,808,395
10,322,002
Net Income
Result from previous years
Surplus for Reappraisal
2014 E
2015 E
2,722
1,654,026
397,580
131,843
86,394
45,017
450
74,650
35,526
2,428,208
9,517
Paid capital
Appraisal of equity
Reserves
Reevaluation of equity
2013
2014 E
73,030
1,443,809
351,462
116,406
84,575
44,182
311
0
23,388
2,137,163
2011
4,482
4,855,113
584,734
127,797
389,455
7,619
1,268,524
7,237,724
Equity
2013
14,480
14,914
15,362
15,823
16,297
16,786
17,290
17,809
20,044
4,482
4,821,851
1,017,108
127,388
438,407
21,596
1,429,798
7,860,630
2014 E
4,482
4,821,851
1,174,071
127,388
398,131
21,596
1,429,798
7,977,317
2015 E
4,482
4,821,851
1,204,150
127,388
493,346
21,596
1,429,798
8,102,611
2016 E
4,482
4,821,851
754,761
127,388
561,697
21,596
1,429,798
7,721,574
2017 E
4,482
4,821,851
925,578
127,388
640,890
21,596
1,429,798
7,971,583
2018 E
4,482
4,821,851
1,119,982
127,388
668,048
21,596
1,429,798
8,193,145
2019 E
4,482
4,821,851
1,106,751
127,388
727,086
21,596
1,429,798
8,238,952
2020 E
4,482
4,821,851
1,036,228
127,388
802,246
21,596
1,429,798
8,243,590
2024 E
4,482
4,821,851
898,912
127,388
1,117,958
21,596
1,429,798
8,421,986
10,785,341
11,067,620
11,472,213
12,100,532
13,290,198
13,635,786
13,589,018
14,470,695
17,888,977
2013
Source: Grupo-Exito and Serfinco Estimates
International Equity Trading Desk
Andres Jimenez
Juan P. Vieira
Andres Gomez
Head of Equity
Head of Trading
Head of Electronic Trading
[email protected]
(574) 3106553
[email protected]
(574) 3106515
[email protected]
(574) 3106544
Daniel Marin
Equity Trader
Andres Upegui
FX Trader
Jose F. Restrepo, CFA
Equity Strategist
[email protected]
[email protected]
[email protected]
(574) 3106518
(574) 3106587
(574) 3106568
Research Team
María Velásquez
Energy and Utilities
[email protected]
(574) 4443522 Ext. 6667
Rafael España
Consumer Services and
Holdings
[email protected]
(571) 6514646 Ext. 4228
Alejandro Isaza
Cement and Construction
[email protected]
(574) 4443522 Ext. 6642
Nicolas Noreña
Financial Services
[email protected]
(571) 6514646 Ext. 4225
Bogotá
Centro de Negocios Andino
Carrera 11 No 82—01. Piso 6
Tel: (571) 6514646
Cali
Carrera 100 No 5—169
Torre Empresarial Oasis of 722 B
Tel: (572) 4858585
Cartagena
Torre Empresarial Protección
Carrera 3 No 6A—100 Of. 801
Tel: (575) 6930292
Medellín
San Fernando Plaza—Torre 1
Carrera 43A No 1— 50. Piso 10
Tel: (574) 4443522
Bucaramanga
Metropolitan Bussiness Park
Carrera 29 # 45 - 45 of 910
Tel: (577) 6970367
Barranquilla
Centro Empresarial Las Américas
Calle 77B No 57—141.
Tel: (575) 3606030
The analyst certifies that the opinions expressed in this report accurately reflect his personal opinion about the company of concern. Also, the analyst certifies that he has
not received, is not receiving and will not receive any direct or indirect payment in exchange for expressing a specific recommendation in this report.
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