investment thesis
Many of us would have preferred to invest in solid, profitable companies like Walmart, Costco, and Kroger in their early days. However, in developed countries, it is difficult to find businesses that can compete with these giants. The company has been growing for decades and the market already knows the quality of the business, so it is already in a stage of low growth and high valuation.
Poland, on the other hand, presents a unique scenario. Despite being part of the European Union and adhering to capitalist policies, the country has only recently emerged from the devastation caused by war and the constraints of communist regimes. In this context, we come across a country that is experiencing economic prosperity, creating opportunities like Dino Polska’s. (OTCPK:DNOPY)—Despite its small size, a supermarket chain that has established itself as A leading domestic player. The company is efficiently run and appears to have potential for growth in the coming years.
This article details the company’s business model and key aspects of its impressive performance in the stock market. Furthermore, we wI’m not going to provide a review that justifies why I think the company is good. “Strong buy” at current prices.
Business overview
Dino Polska is a Polish retail chain that operates a network of grocery stores. He is one of the largest discount supermarket chains in Poland, and its stores sell a variety of food and non-food products, including fresh produce, dairy products, meat, and other daily necessities. The company is rapidly expanding in Poland and making a name for itself in the retail industry.
The company was founded in 1999 by Tomasz Biernacki, who currently owns 51% of the company’s shares and serves on its board of directors. In the same year, he opened his first local store in the Wielkopolska area, with the goal of bringing quality and variety of food, cleaning products and household items closer to customers.
The company currently operates 2,272 stores and has a growing presence in the sparsely populated western region. Part of the company’s strategic plan includes establishing locations in cities with populations of up to 5,000 people, with the aim of meeting previously unmet demand. In the following image you can observe the most populous city in Poland. The high population density in the southern part of the country is clearly highlighted.
Examining the map of Dino Polska’s locations, it is clear that the southern region of Poland has one of the lowest density of stores. The initial idea was to establish a presence in sparsely populated areas, creating an underserved niche market that large supermarket chains might avoid due to limited growth opportunities. But for companies like Dino Polska, this was an opportunity to strengthen and expand their brand.
The company has been opening new stores at a staggering 23% annual rate since 2014, a pace rarely seen at major supermarket chains like Walmart and Kroger. More importantly, there remains a significant underpopulation area in Poland’s eastern region where the company can continue to grow at a similar rate.
Cost management
A key aspect of the paper is the company’s emphasis on tightly controlling costs to increase profit margins and deter competition, making it difficult for competitors to compete on price. That is the point. Fundamental aspects of this strategy include:
Standardization of store format: In this regard, I will quote the strategy that the company describes in its financial report.
Dino Polska’s operational strategy is based on a standardized store design, with parking for customers and a daily supply of fresh products. The sales floor area of ​​most stores is approximately 200 tsubo. 400 square meters. Each store gives customers about $1. There are 5,000 stock keeping units (SKUs), mostly name brand products and fresh produce, as well as a staffed meat department.
The idea behind this approach is to reduce design and construction costs through a standardized format, thereby increasing the predictability of costs associated with opening new stores and enabling more accurate investment planning. is.
Investing in agro-rigina: Since 2003, the company has established a relationship with a meat processing plant called Agro-Rydzyna with the aim of streamlining the supply of meat products and maintaining uniform product standards. Over time, Dino has continued to invest in facility improvements to improve quality, production capacity, and cost efficiency.
Investing in Krot In 2013, Dino founder Mr. Biernacki founded Krot Invest, a specialized company focused on building Dino Polska stores. Similar to the previous point, this approach simplifies the construction process by ensuring uniformity. Moreover, the company prefers to own rather than rent land for its stores, which not only optimizes costs but also hides real estate assets on the balance sheet.
All of these points highlight the founder’s grand vision and, most importantly, prove that the increase in profit margins did not just happen.
main ratio
The company’s growth has been remarkable. Since 2014, revenue has grown at an annualized rate of 32%, EBITDA has increased by 37%, and net income has increased by 42%.
As mentioned earlier, effective cost management and scale benefits have increased our EBITDA margin from 7% in 2014 to the current 9%. We believe that this level of profit margin is sustainable and has the potential for further expansion in the future.
The increase in sales can be attributed to two key factors: new store expansion and increased revenue per store.
The first component is growing at 23% annually and we believe it has the potential to maintain double-digit growth over the next few years. This is supported by the example of similar companies such as Biedronka, which operates around 3,400 stores across Poland, but Dino still has room to expand in many regions.
The second component, revenue per store, grew at 7.5% annually. This growth can be achieved by adjusting prices for inflation or encouraging customers to make larger purchases with each visit.
The company has been reducing its leverage over the years, and its current net debt/EBITDA ratio is 0.56x. This ratio is low, in part because the company owns the majority of its stores and does not need to lease them.
We believe that sharing capital allocation over the past five years is very important as it provides insight into the nature of the company.
Supermarkets are traditionally associated with characteristics such as slow growth, debt, and dividend payments. However, in Dino’s case, its capital allocation is similar to that of a high-growth company. Approximately 77% of the capital is directed toward organic growth, primarily through new store expansions and investments in meat plants.
Similarly, the company relies on cash from operating activities as its primary source of funding. This approach is highly advantageous in the long run, as it keeps interest expense on debt low and allows for continued expansion of profit margins.
As mentioned earlier, the main allocation of capital is towards growth. If we look at the Return on Capital Employed (ROCE), we can see that the company is a very profitable investment. In fact, this percentage has been increasing year by year and is currently around 30%.
evaluation
Returning to the two key variables, the company believes it can maintain the same pace of new store openings per year of 300 to 350 stores per year as it has in recent years. This trend is evident in the first half of 2023, with the company already opening 116 new stores, or 297 when considering the year-on-year change.
For revenue per store, we expect to maintain our historic 7% growth rate. Typically, the company raises prices slightly above inflation, allowing it to achieve a compound annual growth rate of 7% over the next five years. The 10% growth forecast for this year is based on the fact that in the first half of 2023 this indicator increased by more than 10%. Therefore, we expect growth to slow down slightly in the second half of the year.
This means that your total revenue will grow at a CAGR of 20%.
EBITDA margin for the first half of this year was approximately 8.5% and net profit was 5.2%. Cautiously, I would start from this base and expect these margins to potentially increase slightly over subsequent years.
In terms of valuation multiples, we have chosen to maintain a conservative approach, lower than the averages of 35x P/E and 20x EV/EBITDA over the past few years.
Based on these assumptions, the current price of 366 Polish Zloty would give you an annual return of 17.6% over five years. This expected return looks very good, especially considering that there are factors that could further boost earnings, such as higher valuation multiples, further margin expansion, or faster sales growth.
final thoughts
At first glance, the company may not seem cheap in terms of price-to-earnings ratio and other valuation metrics. However, when you factor in both sales and earnings growth, it’s clear that a company with these characteristics can justify a valuation multiple of 25x, and even 30x if growth matches.
about riskThe most obvious, but worth mentioning, is that being located in Poland means less geopolitical stability compared to other parts of the developed world. However, I believe this can be offset by business models that involve essential consumer products such as human food. This provides stable returns regardless of economic crises, inflation, or geopolitical tensions.
Taking all of this into consideration, along with the current valuation, we have decided to assign a “”.strong buy‘ evaluation.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.