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Offering value in tough times

Portobello SpA 23 September 2022 Update
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Portobello SpA

Offering value in tough times

H122 results

Retail

23 September 2022

Price

€19.1

Market cap

€67m

Net debt (€m) at 30 June 2022

27.6

Shares in issue

3.5m

Free float

33%

Code

POR

Primary exchange

Euronext STAR Milan

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(18.7)

(28.5)

(55.7)

Rel (local)

(16.6)

(27.9)

(46.9)

52-week high/low

€43.7

€17.0

Business description

Portobello aims to build a national Italian retail presence (from 29 current stores) via a rapid roll-out of own-stores and franchises. It uses a combination of barter (own and third-party media) and cash purchases to source branded products from its suppliers.

Next events

FY22 results

March 2023

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

Portobello SpA is a research client of Edison Investment Research Limited

Portobello demonstrated strong revenue growth in H122 as it executed its retail-focused expansion strategy. Significantly, given the greater pressures on consumer discretionary income, the more established stores grew on an underlying basis, according to management. It believes the value-based retail offer is well positioned for more difficult economic times. Lower profitability reflects price investment to drive footfall and upfront investment in new trading space. Our operational estimates are unchanged, but our DCF-based valuation reduces to €115/share (€121/ share previously) to reflect a higher bond yield and net debt position.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/20

62.7

8.3

1.96

0.0

9.8

N/A

12/21

85.5

13.0

2.61

0.0

7.3

N/A

12/22e

137.9

17.8

3.33

0.0

5.7

N/A

12/23e

211.0

28.0

5.07

0.0

3.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H122 results: Revenue growth, margin dilution

Portobello’s revenue grew by 81% year-on-year in H122 to €48.8m, with all divisions contributing strong growth. According to management, like-for-like growth in more established stores was positive. Investment to drive footfall and the upfront costs in retail space growth diluted profitability margins. Management believes the former is temporary and the latter should improve as trading space matures. Relative to revenue, free cash flow consumption was broadly stable as lower profitability and higher capital investment were offset by lower investment in working capital. More debt funding led to an increase in the net debt position to €27.6m (€17.3m end FY21).

Forecasts: Operational forecasts maintained

Our operational forecasts for FY22 and FY23 are unchanged despite the more challenging economic background, given the strong revenue performance in H122 and lower assumed revenue growth for H222 (52% versus 81% in H122). H2 is typically a seasonally more important period given the inclusion of the festive period, and Retail should benefit from the continued expansion of its store portfolio and maturing trading at existing stores. We have yet to incorporate forecasts for the recently acquired ePrice due to uncertainty about its accounting treatment (consolidation or equity accounting), which will be clarified in the next few months.

Valuation: Discount to peers and DCF valuation

Portobello’s share price has been weak, as have the share prices of many consumer-facing companies due to increased macroeconomic uncertainty. Portobello continues to trade at a significant discount to its global peers, albeit valuation comparison is complicated by Portobello not yet reporting using International Financial Reporting Standards. Our DCF-based valuation reduces to €115/share (€121/share previously) to take account of a higher Italian bond yield, Portobello’s higher net debt position and the acquisition of ePrice.

H122 results: Strong revenue growth, lower margin

Income statement

Portobello’s H122 results demonstrated strong y-o-y revenue growth of c 81% to €48.8m, while gross profit grew by c 44% to €19.1m (H121 €13.2m) and EBITDA declined by 12% to €6.4m (H121 €7.3m). Against a deteriorating economic backdrop, all of Portobello’s revenue streams grew.

Exhibit 1: Summary income statement

€m

H121

H221

FY21

H122

- Media

14.9

39.6

54.6

24.6

Growth y-o-y

(11%)

50%

27%

64%

- Retail

3.5

8.0

11.5

9.8

Growth y-o-y

59%

134%

105%

180%

- B2B

8.6

10.8

19.4

14.5

Growth y-o-y

92%

13%

37%

68%

Revenue

27.0

58.5

85.5

48.8

Growth y-o-y

16%

49%

36%

81%

- Other revenue

2.4

0.3

2.7

0.2

Value of Production

29.4

58.7

88.2

49.0

Gross profit

13.2

19.7

32.9

19.1

Gross margin

44.9%

33.5%

37.3%

38.9%

EBITDA

7.3

9.2

16.5

6.4

EBITDA margin

24.9%

15.7%

18.7%

13.1%

Net finance costs

(0.2)

(0.7)

(0.9)

(0.4)

PBT

6.2

7.4

13.0

4.3

Tax

(1.8)

(2.4)

(4.2)

(1.6)

Tax rate

29.7%

32.1%

32.3%

36.2%

PAT

4.4

5.0

8.8

2.7

Source: Portobello, Edison Investment Research

Ongoing expansion of the store base, increasing average size of newer stores and maturing previously opened stores led to c 180% year-on-year growth in Retail revenue to €9.8m (H121: €3.5m). The company added six new stores in the period, ranging in average size from 780sqm to 1,500sqm, which compares with the company’s first stores opened, which were typically 200–250sqm. According to management, the stores opened before the start of the year have bucked industry-wide malaise by growing revenue.

Exhibit 2: Retail performance

H121

H122

FY21

H122

Retail revenue (€m)

3.5

8.0

11.5

9.8

Stores at period end

14

21

21

27

Space at period end (sqm)

5,000

12,988

12,988

20,000

Sales per average store (Euro '000)

249

407

657

407

Sales per average square metre (€)

700

890

1,280

592

Source: Portobello, Edison Investment Research

Against a COVID-affected H121, when revenue declined by 11%, Media revenue grew by 64% year-on-year to €24.6m. Portobello’s B2B revenue grew by 68% to €14.5m.

Increased promotional activity to attract more customers and initial cost investment in the new (larger) stores opened during the period before they reached trading maturity (EBITDA break-even in six months) led to the decline in gross margin (by 6pp to 38.9% in H122) and EBITDA margin (by 11.7% pp to 13.1% in H122).

Further down the P&L, the net finance charge doubled to €0.4m as Portobello’s gross debt position increased (see below), and the effective tax rate increased to 36.2% from 29.7% in H121, which benefitted from tax credits.

Cash flow and balance sheet: Investing for future growth

Portobello’s free cash flow consumption of €9.3m increased from €4.9m in H121. In absolute terms, the delta in operating cash flow was a reduction of €2.9m, mainly due to working capital investment increasing by €2.7m to €12.4m and lower absolute net income, which declined by c €2m to €2.7m. Capital investment in tangible and intangible assets grew from €1.3m to €2.9m. Relative to revenue, free cash flow consumption was broadly stable as lower net income and higher capital investment were offset by lower investment in working capital.

Portobello raised two new tranches of debt (€5m each) to help fund its store expansion plans so that by the period end, the net debt position had increased from €17.3m (end FY21) to €27.6m.

ePrice acquisition: Opportunity to be quantified

Following the period end, the acquisition of a 50% stake in ePrice Operations was completed. ePrice is one of Italy’s leading online shops (fourth placed by market share, according to management) which specialises in the sale of high-tech products and household appliances. Subject to the level of internal investment by the two parties (Portobello and Riba Mundo Tecnologia) in the transaction in the coming weeks, Portobello’s shareholding is likely to reduce, therefore the accounting treatment for the acquisition, ie whether it will be partially consolidated or accounted for as an associate, will be determined. Therefore in the near term, we have not consolidated ePrice’s operating results in our estimates, but have included the initial investment by Portobello, half of approximately €6m, in our cash flow forecasts.

Forecasts: Operating forecasts unchanged

Our operating forecasts for Portobello in FY22 and FY23 are unchanged. We assume a similar rate of growth in space for Retail in H222 (c 8,000sqm), as that added in H122 (c 7,000sqm). The second half of the year should be seasonally more important than the first half due to the inclusion of the festive period and Black Friday, and Portobello should benefit from the maturing store profile. We make changes to our estimated net finance charge to account for the higher gross debt position, which includes the recent investment in ePrice.

Valuation: Discount to global peers

The share prices of consumer-facing companies performed poorly throughout H122 and into Q322 as the macroeconomic outlook deteriorated and pressures on consumer discretionary income increased.

As highlighted in our initiation, Portobello’s business model is unique in the public markets, with a combination of media and retail assets and the use of barter to source products. As such, there is no direct peer with which to compare its valuation. In addition, financial reporting under Italian GAAP rather than IFRS means that enterprise value-based multiples are not meaningful, given for example there is no capitalisation of lease liabilities. In addition, under Italian GAAP, lease costs are expensed through the income statement and EBITDA is lower than under IFRS.

The peer valuation table below shows that Portobello continues to trade at a significant discount to other general merchandise and electricals retailers, which have a range of product exposure and are more mature.

Exhibit 3: Peer valuation

Year-end

Share price (local ccy)

Currency

Market cap (local m)

EV (local m)

Sales growth 2022 (%)

Sales growth 2023 (%)

EBIT margin 2022 (%)

EBIT margin 2023 (%)

EPS growth 2022 (%)

EPS growth 2023 (%)

P/E 2022 (x)

P/E 2023 (x)

B&M European Value Retail SA

Mar

333.0

GBp

3,368

5,428

2

6

11.4

10.7

(11)

(3)

9.0

9.3

Ceconomy AG

Sep

1.4

EUR

676

2,971

0

1

1.2

1.5

(38)

22

3.9

3.2

Dunelm Group PLC

Jun

790.5

GBp

1,611

1,896

8

2

12.7

11.9

4

(8)

10.3

11.2

Fnac Darty SA

Dec

30.7

EUR

835

2,475

(0)

1

3.0

3.1

1

6

6.2

5.9

Maisons du Monde SA

Dec

9.0

EUR

396

1,043

(7)

6

5.0

6.1

(57)

50

13.9

9.2

Puuilo Oyj

Jan

5.1

EUR

440

519

N/A

8

15.3

14.5

N/A

3

13.1

12.7

Tokmanni Group Oyj

Dec

12.0

EUR

718

1,023

2

5

8.1

8.3

(13)

9

10.8

9.8

Unieuro SpA

Feb

11.3

EUR

237

204

(2)

(1)

1.7

1.6

(40)

(15)

6.9

8.0

Westwing Group SE

Dec

6.0

EUR

125

111

(17)

8

(6.7)

(2.0)

(353)

(52)

N/A

N/A

European median

(0)

5

5.0

6.1

(25)

3

9.7

9.2

Dollar General Corp

Jan

240.3

USD

54,200

59,065

10

6

9.3

9.3

12

10

21.0

19.1

Dollar Tree Inc

Jan

141.9

USD

31,770

34,500

6

6

8.1

8.5

25

15

19.7

17.1

US median

8

6

8.7

8.9

18

12

20.3

18.1

Total median

1

6

8.1

8.3

(12)

6

10.5

9.5

Portobello SpA

Dec

19.1

EUR

67

95

61

53

13.8

13.9

28

52

5.7

3.8

Source: Refinitiv, Edison Investment Research. Note: Priced at 22 September 2022.

Our updated DCF-based valuation reduces to €115/share (€121/share previously) to take account of the higher Italian bond yield (from 1.9% to 4.2%), Portobello’s higher net debt position and the acquisition value of ePrice. Our estimated WACC has increased to 12.5% (from 12%).

Exhibit 4: Financial summary

€'m

2020

2021

2022e

2023e

31-December

IAB

IAB

IAB

IAB

INCOME STATEMENT

Revenue

 

 

62.7

85.5

137.9

211.0

Value of production

 

 

64.0

88.2

139.4

212.5

Cost of Sales

(42.6)

(52.6)

(91.3)

(134.9)

Gross Profit

20.1

32.9

46.6

76.1

EBITDA

 

 

10.9

16.5

22.2

34.0

Operating profit (before amort. and excepts.)

8.6

13.9

19.0

29.3

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

0.0

(0.6)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

Reported operating profit

8.6

13.3

19.0

29.3

Net Interest

(0.3)

(0.9)

(1.2)

(1.3)

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

8.3

13.0

17.8

28.0

Profit Before Tax (reported)

 

 

8.3

12.5

17.8

28.0

Reported tax

(2.3)

(4.2)

(5.7)

(9.0)

Profit After Tax (norm)

6.0

8.8

12.1

19.0

Profit After Tax (reported)

6.0

8.3

12.1

19.0

Minority interests

0.0

(0.0)

(0.0)

(0.1)

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

6.0

8.8

12.0

19.0

Net income (reported)

6.0

8.2

12.0

19.0

Average Number of Shares Outstanding (m)

2.8

3.1

3.4

3.5

EPS - basic normalised (€)

 

 

2.15

2.84

3.52

5.40

EPS - normalised fully diluted (€)

 

1.96

2.61

3.33

5.07

EPS - basic reported (€)

 

 

2.15

2.66

3.52

5.40

Dividend (€)

0.00

0.00

0.00

0.00

Revenue growth (%)

38.3

36.4

61.3

53.0

Gross Margin (%)

31.5

37.3

33.4

35.8

EBITDA Margin (%)

17.0

18.7

15.9

16.0

Normalised Operating Margin

13.4

15.7

13.6

13.8

BALANCE SHEET

Fixed Assets

 

 

5.1

8.4

18.0

23.7

Intangible Assets

2.9

5.3

6.1

5.4

Tangible Assets

0.7

2.0

6.8

13.1

Investments & other

1.4

1.1

5.1

5.1

Current Assets

 

 

47.4

78.2

108.6

139.4

Stocks

16.4

43.9

61.0

72.6

Debtors

2.6

4.3

8.5

15.0

Cash & cash equivalents

2.6

2.5

3.2

5.6

Other (Including prepaid advertising)

25.7

27.5

35.9

46.2

Current Liabilities

 

 

(23.9)

(36.9)

(50.5)

(68.0)

Creditors (including deferred income)

(15.8)

(23.6)

(35.7)

(50.0)

Tax and social security

(3.7)

(7.0)

(8.5)

(11.8)

Short term borrowings

(4.3)

(6.2)

(6.2)

(6.2)

Other

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(12.5)

(14.7)

(28.6)

(28.6)

Long term borrowings

(12.2)

(13.5)

(27.4)

(27.4)

Other long term liabilities

(0.3)

(1.1)

(1.1)

(1.1)

Net Assets

 

 

16.1

35.0

47.5

66.5

Minority interests

0.0

0.0

0.1

0.1

Shareholders' equity

 

 

16.1

35.0

47.6

66.6

CASH FLOW

Operating Cash Flow

10.9

16.5

22.2

34.0

Working capital

(14.8)

(23.8)

(17.6)

(14.1)

Exceptional & other

(0.3)

(0.9)

(0.0)

(0.1)

Tax

(0.8)

(0.9)

(4.2)

(5.7)

Net operating cash flow

 

 

(5.0)

(9.2)

0.3

14.1

Capex

(2.8)

(2.7)

(8.3)

(10.4)

Acquisitions/disposals

(0.6)

(2.1)

(4.0)

0.0

Net interest

(0.3)

(0.5)

(1.2)

(1.3)

Equity financing

0.1

10.0

0.0

0.0

Borrowings

10.2

3.3

13.9

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

1.0

0.0

0.0

Net Cash Flow

1.6

(0.2)

0.7

2.5

Opening cash

 

 

1.0

2.6

2.4

3.1

FX

0.0

0.0

0.0

0.0

Closing cash

 

 

2.6

2.4

3.1

5.6

Closing net debt/(cash)

 

 

13.9

17.3

30.5

28.0

Source: Portobello, Edison Investment Research

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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