Equity research report Jerónimo Martins SGPS, SA

Catarina Fonseca Moreira Equity Research Report Jerónimo Martins SGPS, SA May 2023 UMinho | 2023 Catarina Moreira Equity Research Report Jerónimo Martins SGPS, SA Catarina Fonseca Moreira Equity Research Report Jerónimo Martins SGPS, SA Master’s Project Master in Finance Supervised by Professor Doutor Nelson Areal May 2023 2 DIREITOS DE AUTOR E CONDIÇÕES DE UTILIZAÇÃO DO TRABALHO POR TERCEIROS Este é um trabalho académico que pode ser utilizado por terceiros desde que respeitadas as regras e boas práticas internacionalmente aceites, no que concerne aos direitos de autor e direitos conexos. Assim, o presente trabalho pode ser utilizado nos termos previstos na licença abaixo indicada. Caso o utilizador necessite de permissão para poder fazer um uso do trabalho em condições não previstas no licenciamento indicado, deverá contactar o autor, através do RepositóriUM da Universidade do Minho. Licença concedida aos utilizadores deste trabalho Atribuição-NãoComercial-SemDerivações CC BY-NC-ND https://creativecommons.org/licenses/by-nc-nd/4.0/ 3 STATEMENT OF INTEGRITY I hereby declare having conducted this academic work with integrity. I confirm that I have not used plagiarism or any form of undue use of information or falsification of results along the process leading to its elaboration. I further declare that I have fully acknowledged the Code of Ethical Conduct of the University of Minho. 4 DISCLAIMER This Equity Research Report was prepared for academic purposes only by Catarina Fonseca Moreira, a student of the Master in Finance at the University of Minho. The report was supervised by a faculty member acting merely as an academic mentor. Neither the author of this report nor the supervisor are certified investment advisors. This report should be read as a pure academic exercise of a master student. The information used to produce this report is generically available to the public from different sources and believed to be reliable by the student. The student is the sole responsible for the information used in this report, as well as the estimates and forecasts, application of valuation methods, and views expressed. The UMinho and its faculty members have no unique nor formal position on those matters and do not take responsibility for any consequences of the use of this report. 5 RESUMO Este Equity Research Report é o resultado do Projeto de Mestrado realizado como parte do programa Mestrado em Finanças da Universidade do Minho. O relatório é sobre o Grupo Jerónimo Martins, uma empresa portuguesa que atua na indústria de Retalho e Distribuição Alimentar em Portugal, Polónia e Colômbia. A estrutura do documento segue as diretrizes fornecidas pelo CFA Institute. O estudo começa com uma introdução sobre a Jerónimo Martins e as suas marcas proeminentes, nomeadamente Pingo Doce, Recheio, Biedronka, Hebe e Ara. Em seguida, o relatório inclui uma análise do desempenho e metas ESG da empresa, bem como uma visão geral da indústria. As seções subsequentes abordam as informações financeiras do Grupo e explicam as metodologias de avaliação utilizadas para a análise. As informações financeiras da empresa foram principalmente obtidas a partir do Relatório Anual de 2021, complementadas pelo relatório preliminar de vendas de 2022. Outros valores incluídos na avaliação foram atualizados pela última vez no dia 25 de abril, sem ajustes subsequentes. O método principal de avaliação utilizado nesta pesquisa é a Avaliação de Fluxos de Caixa Descontados (FCD). Este é complementado por uma Análise de Sensibilidade, Análise de Cenários e Avaliação de Pares para enriquecer a análise e sustentar a recomendação de investimento. Por fim, o relatório é concluído com uma avaliação dos riscos de investimento associados à empresa, a probabilidade de ocorrência e o respetivo impacto. Os resultados da Avaliação FCD resultam num preço-alvo para a ação de 22,90€. Isto representa um potencial de valorização de 5,05% e leva a uma recomendação de investimento HOLD. Em conclusão, este Equity Research Report descreve informações relevantes sobre a Jerónimo Martins, como a estratégia de investimento sólida para a expansão da Ara na Colômbia, a importância das renovações para o Pingo Doce e a Biedronka, uma vez que são marcas mais maduras com forte presença em Portugal e Polónia, e a notável pontuação ESG que eles têm mantido consistentemente. Todos estes fatores destacam a Jerónimo Martins como uma oportunidade de investimento atrativa na indústria de Retalho e Distribuição Alimentar. Palavras-chave: Análise de Sensibilidade, Avaliação de Fluxos de Caixa Descontados, Avaliação de Pares, Jerónimo Martins, Recomendação de Investimento. 6 ABSTRACT This Equity Research Report is the outcome of the Master's Project conducted as part of the Master in Finance program at University of Minho. The report is about the Group Jerónimo Martins, a Portuguese company operating in the Food Retail and Distribution industry across Portugal, Poland, and Colombia. The structure of the document adheres to the guidelines provided by the CFA Institute. The study begins with an introduction to Jerónimo Martins and their prominent brands, namely Pingo Doce, Recheio, Biedronka, Hebe, and Ara. Afterwards, the report includes an analysis of their ESG performance and goals, as well as an industry overview. The subsequent sections delve into the financials of the Group and expound upon the valuation methodologies used for the analysis. The Company's financial information is primarily sourced from the 2021 Annual Report, supplemented by the preliminary sales report from 2022. Other valuation figures were last updated on April 25th, with no subsequent adjustments made. The main valuation method employed in this research is the Discounted Cash Flow (DCF) Valuation. It is complemented with a Sensitivity Analysis, Scenario Analysis, and Relative Valuation to enrich the analysis and support the investment recommendation. Lastly, the report is concluded with an assessment regarding the investment risks associated with the Company, the probability of occurrence and respective impact. The results from the DCF Valuation yield a target share price of 22.90€. This represents a potential upside of 5.05% and leads to a HOLD investment recommendation. In conclusion, this Equity Research Report offers valuable insights into Jerónimo Martins, such as the strong investment strategy in place for Ara’s expansion in Colombia, the importance of renovations for Pingo Doce and Biedronka as these are more mature brands with strong presence in Portugal and Poland respectively, and the notable ESG score they have consistently upheld. All these factors highlight Jerónimo Martins as an attractive investment opportunity in the Food Retail and Distribution industry. Keywords: Discounted Cash Flow Valuation, Investment Recommendation, Jerónimo Martins, Relative Valuation, Sensitivity Analysis. 7 Table of Contents INVESTMENT SUMMARY .................................................................................................................................................. 10 BUSINESS DESCRIPTION ................................................................................................................................................... 11 FOOD RETAIL AND DISTRIBUTION ...................................................................................................................................................... 11 SPECIALIZED RETAIL ............................................................................................................................................................................ 11 AGRIBUSINESS .................................................................................................................................................................................... 11 COMPANY STRATEGY ......................................................................................................................................................................... 11 ENVIRONMENTAL, SOCIAL & GOVERNANCE .................................................................................................................... 12 ENVIRONMENT ................................................................................................................................................................................... 12 SOCIAL ................................................................................................................................................................................................ 13 GOVERNANCE ..................................................................................................................................................................................... 13 INDUSTRY OVERVIEW ....................................................................................................................................................... 13 ECONOMIC OVERVIEW ....................................................................................................................................................................... 13 RETAIL INDUSTRY OVERVIEW ............................................................................................................................................................. 14 COMPETITIVE POSITIONING ............................................................................................................................................................... 14 FINANCIAL ANALYSIS ........................................................................................................................................................ 15 VALUATION....................................................................................................................................................................... 17 FCFF SUM OF PARTS (SoP) .................................................................................................................................................................. 17 STORES AND RENOVATIONS .............................................................................................................................................................. 17 WEIGHTED AVERAGE COST OF CAPITAL............................................................................................................................................. 18 DISCOUNTED CASH FLOW VALUATION .............................................................................................................................................. 19 SENSITIVITY ANALYSIS ........................................................................................................................................................................ 19 RELATIVE VALUATION ........................................................................................................................................................................ 21 INVESTMENT RISKS ........................................................................................................................................................... 22 OPERATIONAL RISKS | OR .................................................................................................................................................................. 22 ECONOMIC RISKS | ER ........................................................................................................................................................................ 22 FINANCIAL RISKS | FR ......................................................................................................................................................................... 23 REGULATORY AND LEGAL RISKS | RL ................................................................................................................................................. 23 APPENDICES ..................................................................................................................................................................... 24 Appendix 1 Board of Directors of Jerónimo Martins SGPS SA ........................................................................................................... 24 Appendix 2 Main shareholders of Jerónimo Martins SGPS SA ........................................................................................................... 24 Appendix 3 ESG Pillar breakdown peer analysis sorted by highest ESG score (source: Refinitiv Eikon) ............................................ 24 Appendix 4 Like-for-like methodology to obtain the quarterly growth rate for Biedronka’s revenues ............................................ 25 Appendix 5 Like-for-like methodology to obtain the quarterly growth rate for Pingo Doce’s revenues ........................................... 25 Appendix 6 Like-for-like methodology to obtain the quarterly growth rate for Recheio’s revenues ................................................ 25 Appendix 7 Like-for-like methodology to obtain the quarterly growth rate for Ara’s revenues ....................................................... 25 Appendix 8 Like-for-like methodology to obtain the quarterly growth rate for Hebe’s revenues .................................................... 25 Appendix 9 Assumptions made to determine financials metrics ....................................................................................................... 26 Appendix 10 Balance Sheet ................................................................................................................................................................ 26 Appendix 11 Income Statement ......................................................................................................................................................... 27 Appendix 12 Cash Flow Statement .................................................................................................................................................... 27 14 conditions prevailing in Poland are of significant interest to JMT's performance. The country's geographical proximity to Ukraine, one of the world's largest wheat producers, and its dependency on Russian fuel and natural gas have contributed to a rise in inflation, resulting in increased energy, distribution, and food prices. Inflation in the food sector has been consistently higher than the CPI, leading to a reduction in purchasing power, which has deeply affected the food retail industry (Figure 14). Interest Rate The Group's estimated debt ratio for 2022E is 28%, indicating that the Company has a relatively low level of financial leverage. However, they are still vulnerable to interest rate increases in their loans, leases, and market expectations. It is worth noting that 100% of Colombian stores, 80% of Polish stores, and 50% of Portuguese stores are rented, which exposes JMT to interest rate volatility. This is particularly concerning given the aggressive expansion strategy for the forecasted period, mostly for Ara, representing a threat (Figure 13). RETAIL INDUSTRY OVERVIEW Poland Biedronka is Jerónimo Martins' largest brand in the retail food sector, and is the leading supermarket chain in Poland. This market is valued at €71.29 billion in 2023 according to Statista, and is expected to grow annually by a CAGR of 7.17% (2023F-2028F) 5 . In the first half of 2022, Biedronka attracted a remarkable 93.5% of customers among all discount stores, boasting the largest customer base. Moreover 24% of all customers exclusively chose Biedronka without visiting other grocery stores 6 . In comparison, the largest competitor, Lidl, has a consumer loyalty base of 5%. Other Biedronka's competitors are Kaufland, Auchan, and Dino. As for the Health and Beauty industry in Poland, it is expected to have a 4.33% CAGR from 2023F to 2027F 7 . Some competitors of Hebe in the Polish market are Rossmann, Sephora, Doz, Apteka Gemini, and Natura, all of which have a strong online presence. E-commerce constitutes 14% of Hebe's entire sales; however, online sales represent 23% for this Polish industry, indicating a significant growth potential for Hebe’s digital commerce. Population growth is another key driver of overall demand in the Polish market, which increased by 4.04% from 2021 to 2022 8 . Portugal Pingo Doce is a well-established player in the Portuguese food retail industry, holding a market share of around 21%. It trails behind SONAE MC, the market leader, holding a market share of 26%. 9 The industry is known for its high level of competition, making it challenging for players to maintain their market position. Other peers in the Portuguese market include Intermarché, Lidl and Auchan. The Cash & Carry brand, Recheio, is a leader in the wholesale segment, along with Makro. Given that Recheio mainly supplies hotels and restaurants, its performance is positively correlated with the tourism activity. Colombia For Ara, the Company is pursuing an aggressive expansion strategy to increase their presence in the Colombian market. Grupo Éxito, with their extensive workforce and diversified offering of store formats, holds a prominent position in the Colombian food retail industry as the country's largest food retailer and the most valuable store brand. Leading grocery discounters, such as Ara, D1 and Justo & Bueno, have emerged in this space, collectively operating a large network of physical stores 10 . JMT's strategy is to capture the market share of small mom-and-pop stores by opening community-oriented stores in neighbourhoods and smaller communities. The Colombian food retail market is expected to grow annually by 6.31% CAGR (2023F-2028F) 11 . COMPETITIVE POSITIONING Threat of New Entrants LOW Entering the food retail market requires significant initial investment in equipment and stores, and net margins are not as attractive as in other industries. In addition, reinvestment in infrastructure is crucial to remain competitive. Among the three markets JMT operates in, the most mature business with the lowest forecasted growth is in Portugal, meaning the threat of new entrants is low for this market. In Poland, despite being the largest market with strong demand drivers, Biedronka occupies the market leadership position, which makes the threat of new entrants relatively low as well. In contrast, Colombia has a higher threat of new 5 Statista. Retrieved in May, 2023, from https://www.statista.com/outlook/cmo/food/poland?currency=EUR 6 AIPH. Retrieved in December, 2022, from https://aiph.org/floraculture/news/biedronka-continues-to-dominate-polands-discounter-market/ 7 Statista. Retrieved in January, 2023, from https://www.statista.com/outlook/cmo/beauty-personal-care/poland?currency=EUR 8 Macrotrends. Retrieved in February, 2023, from https://www.macrotrends.net/ 9 European Supermarket Magazine. Retrieved in March, 2023, from https://www.esmmagazine.com/retail/top-10-supermarket-retail-chains-in-portugal-234618 10 Statista. Retrieved in November, 2022, from https://www.statista.com/topics/7143/supermarkets-in-colombia/#topicOverview 11 Statista. Retrieved in May, 2023, from https://www.statista.com/outlook/cmo/food/colombia?currency=EUR Source: Company Data Source: Author Figure 13: SWOT Analysis Figure 14: Food inflation (%) and CPI (%) in Poland, Portugal and Colombia during 2022 15 entrants due to its underdeveloped market with growth opportunities, and because customers are not as demanding for quality and size, the initial investment needs are lower (Figure 15). Bargaining Power of Suppliers MODERATE Historically, Jerónimo Martins has maintained strong relationships with suppliers, benefiting from a diversified supply chain and multiple distribution centres, which typically reduces the bargaining power of suppliers. However, due to supply chain disruptions caused by the ongoing Ukrainian conflict, there may be an increase in supplier bargaining power, particularly for products that the Company heavily depends on. As JMT has 17 distribution centres in Poland, this represents an advantage over its competitors in mitigating the negative effects of the war. In Portugal, the Group benefits from investments in Agribusiness and the Norwich salmon company. However, in Colombia, the Group is still establishing their own supply chain, which means suppliers may hold more bargaining power compared to the other two countries. Bargaining Power of Customers MODERATE In Portugal, customers are known to be very demanding and price-sensitive, making discountbased strategies effective in boosting sales. With a considerable number of stores nearby each other in most cities, customers in Portugal have high bargaining power. In Poland, customers are not as concerned with pricing as Portuguese customers, and there are fewer stores per square kilometre. As a result, their bargaining power is considered moderate. In Colombia, the market is dominated by mom-and-pop stores, leading to a lot of information asymmetry and a lack of established players, resulting in moderate customer bargaining power as well. Threat of Substitute Products LOW The Group may face potential threats from innovative services like direct-to-customer online sales and grocery delivery services. However, this possibility is being mitigated by JMT with their recent Biek service in partnership with Glovo. Also, the threat of substitution is generally low since food products are essential for human life. Rivalry among existing players MODERATE In Portugal, the food retail market is highly competitive, with established players holding a strong market share. This intense rivalry is driven by both brand and geographical factors. In Poland, Biedronka has upheld the market leader title, but there is still room for growth for other retailers without having to engage in aggressive competition for market share. As a result, rivalry among players in Poland is moderate. In Colombia, the food retail industry is dominated by small companies, presenting many opportunities for growth without the need for extensive competition between players. Therefore, rivalry is currently low in this market. FINANCIAL ANALYSIS A consistent upward trend in sales is evident for Jerónimo Martins along the forecasted period, attributed to the expansion of new stores as well as organic growth per store. These figures already account for the impact of inflation, as they are nominal values. Representatives from Jerónimo Martins have affirmed their intention to mitigate the effects of future inflation by partially shifting the burden to consumers, thereby indicating that inflation is unlikely to significantly impact profitability margins. The forecasted Balance Sheet, Income Statement and Cashflow Statement are displayed in Appendixes 10, 11 and 12. KEY FINANCIALS (M€) 2019YA 2020YA 2021YA 2022YE 2023YF 2024YF 2025YF 2026YF 2027YF Revenues 18638 19293 20889 25369 29253 31259 33479 35917 38470 EBIT 706 639 806 972 1170 1251 1339 1437 1539 Net Income After Taxes 421 323 484 593 716 765 821 883 949 Change in WC 220 246 375 -31 284 931 310 341 357 Capex Payment -577 -510 -604 -639 -665 -690 -713 -734 -753 FCFF 442 452 364 902 740 159 850 897 961 FCFE 339 301 250 773 587 -4 677 714 768 PROFITABILITY RATIOS Gross Profit margin 21.87% 21.91% 21.53% 21.65% 21.65% 21.65% 21.65% 21.65% 21.65% Net Profit margin 2.26% 1.67% 2.32% 2.34% 2.45% 2.45% 2.45% 2.46% 2.47% ROA 5.13% 3.37% 4.89% 5.55% 6.11% 5.80% 5.70% 5.75% 5.79% ROE 19.85% 14.41% 20.22% 23.23% 27.17% 27.44% 27.47% 27.50% 27.40% SOLVENCY RATIOS Debt/Equity 1.40 1.24 1.12 1.20 1.35 1.34 1.32 1.29 1.25 Financial Leverage ratio 3.87 4.28 4.13 4.18 4.44 4.73 4.82 4.78 4.73 Interest Coverage ratio 4.50 3.55 5.23 5.63 5.69 5.69 5.74 5.82 5.92 LIQUIDITY RATIOS Current ratio 0.49 0.52 0.59 0.57 0.65 0.71 0.74 0.77 0.81 Cash ratio 0.18 0.22 0.28 0.23 0.29 0.38 0.41 0.44 0.48 ACTIVITY RATIOS Inventory turnover 14.49 14.97 15.75 16.16 15.74 15.18 15.20 15.21 15.20 Receivables turnover 43.29 47.17 47.91 46.79 40.05 35.33 35.37 35.40 35.37 Payables turnover 3.65 3.61 3.67 4.02 4.18 3.83 3.65 3.65 3.65 Source: Author Figure 15: Five forces of Porter analysis for operations in Poland, Portugal and Colombia Table 1: Key Financials of Jerónimo Martins; actual values for 2019-2021, expected values for 2022 and forecasted values for 2023-2027 16 LIKE-FOR-LIKE METHODOLOGY To forecast revenues, one of the most important factors for the FCFF computation, a Like-forlike approach was applied, using the number of stores as the basis. This Like-for-like analysis compares the revenues of each quarter since 2017 with the number of stores from 2017, then from 2018, 2019 and so forth (Appendixes 4-8). For this calculation, the results using the number of stores from older periods received higher multiplier coefficients, as they involve more data and therefore represent more realistic scenarios. This method resulted in a quarterly revenue growth rate of 0.76% for Biedronka, 0.55% for Pingo Doce, 1.14% for Recheio, 2.01% for Ara and 1.06% for Hebe. This means that, regardless of the opening of new stores, each brand is expected to grow their revenues quarterly by these percentages. REFUGEE IMPACT In Poland, Biedronka’s revenues grew 20.90% from 2021 to 2022. Part of this growth is attributed to the refugees from Ukraine that moved to Poland to escape the ongoing conflict. In total there were 1.6 million people in that situation, which corresponds to around 4.24% of the Polish population. Assuming that they will gradually leave the country during 2023, 2024 and 2025, a decreasing discount rate was applied in Biedronka’s revenues for these years. This is a way to account for the sales to these potential customers that will not be consistent in the long run. KEY FINANCIALS The Operating Profit of Jerónimo Martins, along with other performance factors, exhibits a strong growth trajectory in the short term. The projected growth for 2023YF is comparable to the growth observed in 2022YE, with a stabilized growth rate anticipated for the subsequent four years. A comprehensive breakdown of the assumptions utilized in estimating each component contributing to the operating profit is found in Appendix 9. The Net Income, considered the ultimate metric of annual performance, follows a similar growth pattern as the operating profit. The Group has consistently demonstrated stable margins in recent periods, which signifies a robust financial position. This consistent growth in net income further reinforces the financial health of Jerónimo Martins, since it implies a sense of maturity with lower variation and therefore reduced risks for equity holders. The negative Change in Working Capital observed in 2022YE is attributed to maintaining turnovers at historical averages. However, this trend is swiftly reversed in 2023YF, with subsequent periods showing stable and consistent values similarly to previous periods. The decision to project the growth of Inventories, Trade Debtors, and Trade Creditors based on their respective turnover rates was derived from an analysis of past periods, leading to the conclusion that this approach best aligns with realistic long-term forecasts. The Free Cash Flow to Firm represents the amount of cash available to all investors, including equity and debt holders. For JMT it is anticipated steady growth in FCFF over the coming years, with the exception of 2024YF, due to an outlier value regarding the change in working capital. Nonetheless, this anomaly is rectified in 2025YF, and a stabilized trend is projected to persist in the long run. A waterfall breakdown analysis from Revenues to FCFF is displayed in Figure 16. For the Free Cash Flow to Equity, similar expectations are held for the long term, with anticipated maintenance of a stable trend from 2025YF on. Profitability One of the key assumptions for Jerónimo Martins’ financials forecast is the ability of the Group to maintain gross profit and net profit margins stable in the foreseeable future. In the near future, it is anticipated a consistent Return on Assets for Jerónimo Martins, albeit with a potential standard error induced by macroeconomic uncertainties (Figure 17). When considering the industries in which JMT operates, it is typically observed lower variability and consequently a lower level of risk compared to the broader market, suggesting that investing in the Company may offer relative safety during bearish market conditions. However, it is important to note that the aggressive investment strategy in the latest periods and near future possibly leads to mistimed decisions that may not be favourably received by the market. Regarding the Return on Equity, the expectation is for an increase in 2023YF, which is also substantiated by the aforementioned arguments regarding ROA. The aggressive investment path lately pursued by the Group reinforces the anticipation of subsequent growth in returns. Additionally, considering that investors tend to favour anticyclical investments during bearish market conditions, JMT may present itself as a prudent investment choice. Solvency Regarding solvency, the Debt-to-Equity ratio is expected to increase from 1.20 to 1.35, reflecting the upsurge in Financial Leverage as the Group expands the stores network, especially for Biedronka and Ara. This is mainly reflected through the increase in the value of non-current leases. For the following periods, these metrics are anticipated to stabilize and even reduce in the long run, as the investment in physical stores is expected to slow down Source: Company Data and Author Source: Company Data and Author Source: Company Data and Author Figure 16: Waterfall from Revenues to Free Cash Flow to Firm in 2022 Figure 17: Profitability ratios Figure 18: Solvency ratios 17 (Figure 18). The Interest Coverage Ratio is projected to slowly increase over time, signalling a slight improvement in the company's ability to meet interest obligations. These considerations lead to conclude that JMT’s solvency is on the path to improve, motivated by solid equity growth and stable levels of debt. Liquidity Jerónimo Martins’ liquidity is projected to keep improving as the latest trend suggests, mainly because of increasing levels of cash over the forecasted period, due to a solid operating cashflow generation. Activity Ratios The stability of the Inventory turnover ratio indicates a good predictability of future cashflows in order to remain competitive while demand fluctuates (Figure 19). A ratio of 15.2 indicates that JMT’s inventories last on average 24 days. Regarding Receivables turnover, even though this metric seems to have been improving in recent periods, it is expected to be lower for the following years, reflecting the overheated economy as the aftermath of the COVID-19 pandemic and current recession environment. A ratio of around 35.4 indicates that it takes 10 days to collect receivables. This metric stands out as a positive aspect of the Group's operations. For the Payables turnover, the low values reflect the favourable credit terms JMT has with their suppliers. A ratio of 3.65 indicates that the company takes around 100 days to pay their creditors and suppliers. Dividend Policy Jerónimo Martins’ payout policy describes an ideal dividend payout ratio between 40% to 50% of net earnings 12 . The Group has consistently paid earnings every year, but recently the company has found itself with more excess cash, which supported their decision for extraordinary dividends, reaching a payout ratio of 95.5% in 2022. This undermines valuation methods such as the Dividend Discount Model. For the forecasted period, it was assumed a constant dividend payout ratio equal to 45%. VALUATION The main valuation approach employed for Jerónimo Martins is the Discounted Cash Flow (DCF) Valuation, known for its thoroughness and comprehensive nature. This approach considers the future cash flows that were projected using a Like-for-like methodology and a forecast of store openings and renovations for each brand, therefore presenting a forwardlooking perspective. The DCF Valuation was followed by a Sensitivity Analysis, a Scenario Analysis and a Relative Valuation, as complementary approaches, to enrich the analysis and substantiate the investment recommendation. FCFF SUM OF PARTS (SoP) To cater to the unique characteristics of the countries where JMT operates, the FCFF Sum of Parts method proves to be suitable, particularly given the rapid growth of the Colombian and Polish brands compared to the Portuguese brands. By projecting revenues for each brand and consolidating the results, the DCF valuation yields a 2023YF price target of 22.90€ per share. With Poland constituting JMT's largest segment at 70.7% of revenues, the Group continues to heavily invest in the Polish market, aiming to maintain its position as the leader in Poland's food retail industry. While Portugal holds historical significance for Jerónimo Martins as its birthplace, the Company's focus on future growth has shifted away from the Portuguese market. CEO Pedro Soares dos Santos has expressed a cautious outlook on the long-term prospects of the Portuguese economy. Consequently, the Portuguese brands Pingo Doce and Recheio, have experienced slower growth compared to their Polish and Colombian counterparts. Although currently representing a modest portion of JMT's total sales at 7%, Ara is witnessing the most aggressive and expansive investment strategy within the company. This market is poised to continue its growth trajectory in the upcoming years. The conducted valuation acounts for all these aspects. STORES AND RENOVATIONS In 2022 alone, 275 new stores for Ara were opened and 1 was closed. Meanwhile, Pingo Doce opened 7 net new stores, Recheio with 1 new store, Biedronka with 145 new stores and Hebe with 24 new openings. In total, 451 net stores were opened. This means that around 93% of new stores belong to Ara and Biedronka, reinforcing the belief that these two brands are the future value drivers of the Company. 12 Jerónimo Martins. Retrieved in December, 2022, from https://www.jeronimomartins.com/en/investors/jeronimo-martins-shares/dividend/ Source: Author Source: Company Data and Author Figure 19: Activity ratios Figure 20: Forecasted number of store openings per brand 2023-2027 18 For Ara, Jerónimo Martins intends to maintain the current aggressive expansion, therefore the forecast is of 200+ new stores per year up to 2025, and slower growth in the following periods (Figure 20). In the Group’s strongest market, Biedronka is expected to continue opening 100+ stores in the near future. For Pingo Doce, since it is a mature brand, the expectancy is to continue opening around 10 stores per year as has happened in the previous periods. In the Health and Beauty sector, Hebe’s forecasted store openings are purely based on historical data. The forecast for Recheio is to maintain the current number of stores during the forecasted period. In relation to renovations, historical data from JMT shows that the number of stores renovated annually for Biedronka account for approximately 12% of the total number of stores Biedronka had five years before. For Ara, Pingo Doce and Hebe, the percentage is around 10%. Therefore, these values were kept for future projections (Figure 21). Assessing the effect of these renovations on brand revenues, it is important to note that while they attract more customer visits, it was assumed that each renovated store has one-fourth the sales impact of a new store opening. WEIGHTED AVERAGE COST OF CAPITAL Jerónimo Martins operates in different markets with divergent risks, especially when factoring in the Ukrainian conflict, which neighbors Poland, where most of the Company’s revenue comes from. Therefore, a WACC weighted by the revenue from each segment is warranted. Also, because of the store openings over the forecasted period, the weight of revenues from each brand will shift, giving more predominance to Ara over time. This justifies computing distinct WACC values on a yearly basis. Cost of Debt (after tax) Since JMT does not currently have bonds in the market, one way of determining its Cost of Debt is by looking at the Yield to Maturity of a bond from a comparable peer. Carrefour S.A. has a bond with maturity in Dec/2027 and a current YTM of 3.67% 13 . Also, the total interest paid by Jerónimo Martins from loans and leases (in accordance with IFRS16), adjusted for the effective tax rate (25.77%) corresponds to 3.66% of total loans and leases from the Balance Sheet. This demonstrates that a Cost of Debt of 3.67% is suitable. Cost of Equity This variable was calculated through the CAPM model (Table 2). The Risk-Free Rates are based on the US Government 10Y Bond Yield. For 2023 the rate corresponds to the Bond Yield on the 25th of April 14 . As for the following years, the Risk-Free Rates are assumed to correspond to the US treasury par yield curve rates, as they represent market sentiment and economic trends. These values were obtained for each forecasted year based on the different bond maturities, also on the 25th of April 15 . The Equity Risk Premium is the value for the US market, obtained via Damodaran’s website, as well as the Country Risk Premiums (Portugal: 3.29%; Poland: 1.46%, Colombia: 3.29%) 16 . For the final component, the unlevered betas for each industry in each market were found in Damodaran’s website and were leveraged according to JMT’s Debt-to-Equity ratio and effective tax rate, using the bottom-up approach. The unlevered beta for Hebe was manually computed using as peers the companies L’Oreal SA, Beiersdorf AG, Jacques Bogart SA, Madara Cosmetics AS and Ontex Group NV, as the beta insights found for the Beauty industry were not cohesive. Since the betas differ between industries and countries, and because the Country Risk Premium is added to the equation, a value for the Cost of Equity was computed for each brand. Then, a weighted average Cost of Equity for 2023 was obtained, based on the weights of the revenues from each segment. Because these weights change over time (Figure 22), as does the Risk-Free Rate, a final Cost of Equity was calculated on a yearly basis. 13 Börse Frankfurt. Retrieved in April, 2023, from https://www.boerse-frankfurt.de/bond/fr0013505260-carrefour-s-a-2-625-20-27 14 Investing.com. Retrieved in April, 2023, from https://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-historical-data 15 U.S. Department of the Treasury. Retrieved in April, 2023, from https://home.treasury.gov/resource-center/data-chart-center/interestrates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2023 16 Aswath Damodaran. Retrieved in February, 2023, from https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html Source: Author Source: Author Portugal Biedronka Hebe Ara % Rev 23F 22.0% 68.7% 1.6% 7.8% % Rev 24F 21.9% 67.2% 1.6% 9.3% % Rev 25F 21.6% 65.9% 1.7% 10.7% % Rev 26F 21.4% 64.7% 1.7% 12.2% % Rev 27F 21.2% 63.5% 1.8% 13.5% Figure 21: Forecasted number of store renovations per brand 2023-2027 Figure 22: Percentage of revenues from each brand over time 19 Table 2: Values of all metrics included in the calculation of the yearly Cost of Equity With a Debt proportion of 18% and an Equity proportion of 82%, based on market values, the WACC for each forecasted year is: Table 3: Weighted Average Cost of Capital (%) for forecasted period DISCOUNTED CASH FLOW VALUATION Free Cash Flow to Firm (FCFF) Beginning with Operating Profit (EBIT), calculated as Gross Profit (Revenues-COGS) minus SGA expenses, then the effect of taxes is subtracted to obtain the after-tax Operating Profit. By adding back depreciations, and finally subtracting the Change in Working Capital and Capital Expenses payments (CAPEX), the following values for the FCFF were obtained: Table 4: Free Cash Flow to Firm in M€ for forecasted period Terminal Growth Rate The Terminal Growth Rate is a very important factor for Jerónimo Martins’ valuation, as it represents the rate at which the Group is expected to grow perpetually. This value was computed as an average of the actual growth rates from 2017 up to 2022, excluding the year 2021 as it was the most atypical during that period. For the remaining years, the average was computed by applying higher multiplier coefficients to the years 2017 and 2022, as these better represent stable growth rates for a mature firm such as JMT. This culminated in a Terminal Growth Rate of 2.41%, which is a feasible value, commonly associated with mature companies (Table 5). Table 5: Actual growth rates from 2017 to 2022 and Terminal growth rate (%) Terminal Value For this valuation, Terminal Value is assumed to be the present value of future cashflows from 2028 onwards. This value was determined by applying the Gordon Growth Model, in which the 2027 FCFF grows at the Terminal Growth Rate and this value is then divided by the Terminal WACC minus the Terminal Growth Rate. After this computation, the estimated Terminal Value is 19 337 M€. To find the Enterprise Value, the present value of the Terminal Value is added to the sum of the present values of the yearly FCFF from the period of 2023YF to 2027YF. Then, after adjusting for the current amounts of cash and debt from Jerónimo Martins, and dividing by the number of shares available in the market, the target price obtained per share is 22.90€. SENSITIVITY ANALYSIS In this section it is observed the impact of slight variations in some of the key metrics of the valuation on the target share price. The Terminal Growth Rate, Terminal WACC and EBIT Margin were defined as some of the most important variables in a Food Retail industry environment, as inflation and economic prospects are of key importance in 2023. By applying 0.3% shifts on the Terminal Growth Rate, the results are a range of target price values from 18.67€/share in a bearish scenario, to 29.79€/share in a bullish scenario (Table 6). Risk-Free Rate 2023 2024 2025 2026 Terminal 3.40% 4.60% 3.86% 3.62% 3.40% Equity Risk Premium Country Risk Premium Portugal Biedronka Hebe Ara 3.29% 1.46% 1.46% 3.29% Unlevered Betas 0.39 0.39 0.40 0.56 Levered Betas 0.46 0.46 0.47 0.65 WAverage Cost of Equity 2023 9.39% 7.56% 7.63% 10.57% 8.20% Cost of Equity 2024 10.59% 8.76% 8.83% 11.77% 9.44% Cost of Equity 2025 9.85% 8.02% 8.09% 11.03% 8.74% Cost of Equity 2026 9.61% 7.78% 7.85% 10.79% 8.54% Cost of Equity 2027 9.39% 7.56% 7.63% 10.57% 8.36% 5.94% 2023 2024 2025 2026 2027 WACC 7.37% 8.38% 7.81% 7.65% 7.50% 2023 2024 2025 2026 2027 FCFF (M€) 739.74 158.69 850.37 897.29 961.38 2017 2018 2019 2020 2021 2022 Terminal Growth Rate (g) 0.35% 0.22% 6.02% 5.49% 8.12% 0.84% 2.41% 20 Table 6: Terminal growth rate sensitivity analysis In a discounted cash flow (DCF) valuation, the Terminal WACC is used to calculate the present value of cash flows beyond the projection period, having a notable impact on Jerónimo Matins' valuation. Measuring the impact of 0.3% changes in this variable leads to a variation of the target share price between 18.65€ and 29.75€ (Table 7). This suggests that the sensibility of the share price to changes in the terminal WACC and to changes in the terminal Growth Rate is identical. Table 7: Terminal WACC sensitivity analysis EBIT Margin allows investors to understand the true business costs of running JMT. However, retailers tend to have lower profit margins when compared to other industries. As mentioned, inflation can have a significant impact on the Group's profitability margins, and consequently, their EBIT margins, which could make the price range from 16.60€/share in a high inflation scenario (WACC values are held constant), to 29.19€/share in a low inflation scenario (Table 8). This scope is significant, so the Company should be focused on mitigating the effects of inflation to keep profitability margins high and maintain investor confidence. Table 8: EBIT margin for forecasted period sensitivity analysis Predicting the opening of new stores is crucial for Jerónimo Martins' valuation because it directly affects the Group's revenue growth potential. In spite of that, variations in the opening of new stores will cause shifts in the proportion of that specific brand's revenues to total revenues. This directly impacts the Cost of Equity, as it was calculated on that basis. Since the Cost of Equity computed yearly for Poland remained very approximate to the final weighted Cost of Equity, the shifts on the opening of new stores are not very prominent. In a range of -100 new stores up to +100 new stores for each year, compared to the initial forecast, the interval for the share price moves between 22.55€ and 23.04€, always kept above the current market share price (Table 9). Table 9: Difference in new Biedronka stores sensitivity analysis For Ara, the circumstances somewhat diverge. Since the Cost of Equity yearly values for Colombia are consistently higher than the final weighted Cost of Equity, the shifts on the opening of new stores are accentuated in a negative form. In a range of -150 new stores up to +150 new stores for each year, the interval of the share price moves between 23.46€ and 22.38€ (Table 10), meaning that the more Ara stores JMT opens, the lower is the target share price. This is because equity as a source of capital in Colombia is more expensive than in Portugal or Poland. Table 10: Difference in new Ara stores sensitivity analysis SCENARIO ANALYSIS This section includes a Monte Carlo simulation with 100k iterations by flexing the variables Terminal Growth Rate and Terminal WACC, to gain a more holistic view on the possible Jerónimo Martins share price trajectory under today’s market uncertainty. This was achieved using RStudio to obtain a triangular distribution for both variables. The minimum and maximum values were defined according to the Sensitivity Analysis tables on the above section. Therefore, the Terminal Growth Rate has a range between 1.21% and 3.61%; as for 1.21% 1.51% 1.81% 2.11% 2.41% 2.71% 3.01% 3.31% 3.61% 18.67 € 19.57 € 20.57 € 21.68 € 22.90 € 24.31 € 25.90 € 27.70 € 29.79 € Terminal Growth Rate 8.70% 8.40% 8.10% 7.80% 7.50% 7.20% 6.90% 6.60% 6.30% 18.65 € 19.55 € 20.55 € 21.66 € 22.90 € 24.29 € 25.86 € 27.67 € 29.75 € Terminal WACC 3.2% 3.4% 3.6% 3.8% 4.0% 4.2% 4.4% 4.6% 4.8% 16.60 € 18.17 € 19.75 € 21.32 € 22.90 € 24.47 € 26.04 € 27.61 € 29.19 € EBIT Margin for forecasted period -100 -50 "+ 50 "+ 100 22.55 € 22.82 € 22.90 € 22.97 € 23.04 € Difference in new Biedronka stores per year -150 -100 -50 "+ 50 "+ 100 "+ 150 23.46 € 23.27 € 23.09 € 22.90 € 22.72 € 22.54 € 22.38 € Difference in new Ara stores per year 21 the Terminal WACC, it varies between 6.30% and 8.70%. The final share price distribution is displayed in Figure 23. Given the data from this analysis, around 65% of the outcomes show a share price above the current market price of 21.80€, which supports the Hold recommendation in this report. Adding to this, around 18% of the results correspond to a share price of over a 20% upside (26.16€/ share). Furthermore, considering the summary information from the distribution (Table 11), the minimum outcome corresponds to a downside of around 27% relative to the current price, but the maximum value represents a more accentuated shift: an upside of over 86%. Table 11: Summary of the Monte Carlo simulation - triangular distribution RELATIVE VALUATION The following table presents a Relative Valuation analysis that compares Jerónimo Martins with six handpicked peers (Table 12). The aim of this comparable assessment is to determine the Group’s market value based on the peers’ respective ratios. The selection of peers was based on industry and geographical source of revenues, with all companies operating in the Food Retail/ Food Distribution sectors. Carrefour SA, Tesco PLC, and J Sainsbury PLC are headquartered and operating physical stores in the European region, while Dino Polska SA is a primary competitor to Biedronka in Poland. In Colombia, Almacenes Exito SA is the main rival of Ara, while Sonae SA is the main competitor of Pingo Doce in Portugal. The ratios applied are the EV/Sales, EV/EBITDA, EV/EBIT, Price-to-Earnings and Price-to-Sales. For the first three ones, the market value is obtained after adjusting to the amounts of Cash and Debt of JMT. These ratios were obtained in Refinitiv Eikon. Table 12: Relative Valuation analysis between Jerónimo Martins and six peer companies Upon analysis of the table presented, it can be inferred that there are significant differences between each of the peer companies. While there are some similarities in the metrics of Carrefour and Sainsbury, no other pair of companies share those same similarities. Additionally, any extreme outliers highlighted in red were not included in the computations. Following the collection of all the ratios, a weighted average was calculated based on the market capitalization of the companies. After comparing the EV/EBITDA ratio obtained from its peers, Jerónimo Martins is considered undervalued. However, it is overvalued compared to all other metrics. Of particular concern is the Price-to-Sales ratio, where Jerónimo Martins has a value of 0.54, more than double the weighted average of 0.25 from the peers. It is worth noting that this may be attributed to the Biedronka business in Poland, as the value for its main competitor Dino Polska is four times that of JMT, and was not considered in the average computation. Overall, the Group is overvalued when compared to their peers, which can be attributed to differences in size, locations, and business models. In light of the conclusions drawn from the previous analysis, two additional comparisons were carried out to evaluate the Group’s performance, namely with the Global industry average and with the European industry average (Table 13). The values were obtained from Damodaran's website, regarding the "Retail - Grocery and Food” industry, which also includes JMT. Minimum 1st Quantile Median Mean 3rd Quantile Maximum 15.99 € 20.96 € 22.90 € 23.34 € 25.24 € 40.68 € Data of 2022 LFY 31/12/2022 LFY 25/02/2023 LFY 05/03/2022 LFY 05/03/2023 LFY 31/12/2022 LFY 31/12/2022 JMT SA Carrefour SA Tesco PLC Sainsbury PLC Dino Polska SA Alm. Exito SA Sonae SA WAverage MKT Cap Share Price Result EV/SALES 0.57 0.35 0.47 0.38 2.17 0.35 0.57 0.42 8972.43 14.28 € Overvalued EV/EBITDA 8.18 6.33 7.22 5.25 23.18 4.67 9.74 9.36 14725.76 23.43 € Undervalued EV/EBIT 14.81 12.22 11.90 11.53 27.9 7.13 103.19 14.51 12352.71 19.66 € Overvalued P/E 23.09 10.29 27.89 9.60 36.67 53.95 6.99 21.75 12903.81 20.53 € Overvalued P/Sales 0.54 0.17 0.31 0.22 2.1 0.26 0.27 0.25 6408.17 10.20 € Overvalued Mkt Cap (1M USD) 14959.87 25369.50 8249.81 10011.61 1179.69 2276.50 Average 17.62 € Overvalued Industry Weight 24.11% 40.89% 13.30% 16.14% 1.90% 3.67% Figure 23: Graphical representation of the Monte Carlo simulation Source: Author 22 Table 13: Relative Valuation analysis between Jerónimo Martins, the Global industry average and the European industry average Given the Industry average for Europe, Jerónimo Martins would still be considered overvalued, but with an overall share price closer to the current market price of 21.80€/share. In this case, the Price-to-Earnings ratio indicates that the Group is undervalued, and the EV/EBITDA ratio results in a value close to the current share price, proving to be a reliable metric for JMT’s Relative Valuation. Conducting a comparison with the Global Industry average appears to be imperative, considering Ara’s operations in Latin America over the past decade and its continuous expansion. The outcome of this analysis reveals an overall average share price of 23.28€, which signifies that Jerónimo Martins is undervalued, and is closely aligned with the target share price of 22.90€ obtained with the DCF Valuation. This can be attributed to the investors’ belief that operations in Colombia will continue to follow an aggressive growth path, or possibly that the Group will expand to other markets, as has been mentioned as a future possibility in past communications. These conclusions are consistent with the Hold recommendation in this report and reveal the importance of combining both valuation methods. INVESTMENT RISKS OPERATIONAL RISKS | OR Supply Chain | OR1 Probability MODERATE | Impact MODERATE The pandemic had a significant impact on businesses, including Jerónimo Martins, with disruptions to the supply chain and transportation of goods. The ongoing conflict in Ukraine also affects global supply chains due to agricultural production shocks. In Colombia, social protests and strikes in 2021 caused disruptions to the domestic supply chain. These events underline the importance of having a strong and diversified supply chain to sustain operations. JMT's Agribusiness, operational in Portugal, is a valuable way of mitigating the effects of such disruptions by ensuring regular production and supply to customers. Therefore, the impact of this risk is moderate (Figure 24). ECONOMIC RISKS | ER Innovation & Competition (ER1) Probability LOW | Impact LOW E-commerce has become increasingly important in recent years due to the convenience and flexibility it offers to both businesses and consumers. In addition, e-commerce demand has been exponentiated by the pandemic, especially for food retailers, as several stores closed, and people turned to online shopping as a safer alternative. To respond to this new way of doing business, JMT launched Biek, and is focused on accelerating their online presence, especially for Hebe. Geopolitical Risk (ER2) Probability MODERATE | Impact HIGH The Ukrainian war had a significant impact on global food prices, particularly for grains such as wheat and corn, since the conflict disrupted agricultural production in the country, which is one of the world's largest grain exporters. In addition, the imposition of sanctions on Russia, another major grain exporter, also contributed to higher food prices, affecting costs and supply chain operations for many retailers. Also, the expected return of Ukrainians that sought refuge in Poland to their home country once the conflict comes to an end will have a negative impact in Biedronka’s revenues, since these families have been contributing to the recent boost in sales. Updated by Damodaran on 05/01/2023 Updated by Damodaran on 05/01/2023 JMT SA Industry Average (Global) MKT Cap Share Price Result Industry Average (Europe) MKT Cap Share Price Result EV/SALES 0.57 0.65 14734.08 23.45 € Undervalued 0.55 12197.18 19.41 € Overvalued EV/EBITDA 8.18 9.04 14157.72 22.53 € Fairly valued 8.80 13735.24 21.86 € Fairly valued EV/EBIT 14.81 14.28 12124.39 19.29 € Overvalued 12.71 10598.35 16.86 € Overvalued P/E (trailing) 23.09 35.32 20956.73 33.35 € Undervalued 28.26 16767.76 26.68 € Undervalued P/Sales 0.54 0.44 11162.36 17.76 € Overvalued 0.32 8118.08 12.92 € Overvalued Average 23.28 € Undervalued Average 19.55 € Overvalued Source: Author Figure 24: Risk Matrix 23 Taxation Risk (ER3) Probability MODERATE | Impact MODERATE-HIGH As Jerónimo Martins operates in three distinct markets, it is subject to diverse tax codes. Any increase in tax rates leads to a decrease in net profits. In 2022, the Portuguese government approved a European regulation that imposes an extraordinary tax of 33% on companies in the Energy and Food Distribution sectors, which includes JMT, that reported profits 20% above the average of their last four years' net profits 17 . In Poland, a new tax was introduced to target large retailers with price advantages, which translates to 0.8% or 1.4% of their sales, depending on revenues 18 . These new tax regulations have a direct impact in JMT’s financial performance. FINANCIAL RISKS | FR Interest Rate Risk (FR1) Probability LOW | Impact MODERATE-LOW Market risk refers to the impact that changes in interest rates have on the valuation of JMT as an asset, since higher interest rates can result in investors demanding a higher return on their invested capital. Given that most of the Group's debt has fixed interest rate terms, the probability of this risk is low. On the other hand, cash flow risk is the risk that changes in interest rates can affect a company's cash flow, potentially impacting its profitability and ability to meet financial obligations. Companies can use financial instruments such as swaps and futures to hedge against changes in interest rates and macroeconomic variability. Jerónimo Martins issues its debt in the currency in which they intend to invest the money, and uses various derivatives to protect their financial position. Therefore, this risk can be regarded as having moderate to low impact. Foreign Exchange Risk (FR2) Probability MODERATE-LOW | Impact MODERATE Jerónimo Martins is exposed to Foreign Exchange risk due to its operations in three countries with three different currencies: Euro, Złoty, and Colombian Peso. Most of JMT’s revenues are in Złoty, making variations in the EUR/PLN pair relevant for the Company. Additionally, the Group's expansion in Colombia means that the EUR/COL pair will become increasingly important over time. Historically, JMT has faced challenges as the Euro has tended to appreciate relative to both the Colombian Peso and the Polish Złoty (Figure 26), which can negatively impact their financial performance, especially as they pursue aggressive expansion in both Colombia and Poland, which together result in around four times the revenues that JMT earns in Portugal. Inflation Risk (FR3) Probability HIGH | Impact MODERATE Inflation can have a significant impact on the costs of production for a company that is highly dependent on energy prices, especially transportation costs. Additionally, Personnel Costs (wages) and investment in the construction of new stores, which reflect wages and commodity price effects, are also influenced by inflation. To mitigate the impact of inflation on its operations, the Group plans to increase prices for their products to pass some of the inflation costs onto the final consumer. Despite the retail sector being highly sensitive to inflation, JMT's economies of scale and stable relationships with suppliers suggest that the impact of inflation-related risks is only moderate, even though the probability of such risks is high for today’s economic conditions. REGULATORY AND LEGAL RISKS | RL Regulatory and Legal Risk (RL1) Probability MODERATE-HIGH | Impact MODERATE-LOW The implementation of the "Sunday Trading ban" law by the Polish government in 2018 has required big retailers such as Biedronka and Hebe to close on Sundays 19 , while antitrust authorities in both countries create pressure on JMT's operations. In addition, the retail industry typically experiences a high turnover of workers, and large retailers like Jerónimo Martins often employ a significant number of minimum wage workers. As such, an increase in the minimum wage creates pressure on labour costs and reduces profit margins for the Company. This presents a moderate to low impact risk, but with a moderate to high probability of occurrence. 17 Essential Business. Retrieved in January, 2023, from https://www.essential-business.pt/2022/11/18/government-starts-energy-and-supermarket-windfall-taxes/ 18 EY. Retrieved in January, 2023, from https://www.ey.com/en_gl/tax-alerts/poland-implements-retail-sales-tax-effective-from-1-january-2021 19 Notes from Poland. Retrieved in December, 2022, from https://notesfrompoland.com/2022/08/25/sunday-is-time-for-prayer-and-family-not-shopping-polishgovernment-reminds-retailers/ Source: Refinitiv Eikon Source: Refinitiv Eikon Figure 25: 10Y Treasury Bonds by country Figure 26: Exchange rate evolution from 2012 to 2022