Label Vie: Distribution

COMPANY OVERVIEW: Label Vie is the number two operator in the modern distribution sector in Morocco, with a 30% market share in terms of surface area versus 54% for Marjane/Acima, its competitor. The group operates in three business segments: supermarkets, in which it is number one, with 43 stores; hypermarkets, in which it is number three, with three stores; and hyper cash, in which it is number one, with nine stores. LBV operates its stores under Carrefour brands through a franchise agreement with the French group, using “Carrefour Markets” for supermarkets, “Carrefour” for hypermarkets and “Atacadao” for hyper cash stores.

For its future development plan, the group expects to increase its total selling area by 18,000 sq metres per year, which represents four to five new supermarkets (total of 6000 sq metres), one new hypermarket (6000 sq metres) and one new Atacadao (6000 sq metres) each year.

Over the first half of 2013, Label Vie’s consolidated sales stood at Dh2.8bn (€248.6m), up 4.4% in a context marked by a significant slowdown in domestic consumption in Morocco. This growth was mainly driven by the impact of newly opened stores (+Dh106m, or €9.4m) and by the positive impact of the conversion of Metro stores into Atacadao stores (+Dh48m, or €4.3m). On a constant basis, supermarkets and hypermarkets sales were down by Dh50m (€4.4m) compared to H1 2012.

Following the conversion of the Metro stores into Atacadao stores (hyper cash stores generating lower direct and back margins but meant to realise strong future growth in sales), margins in terms of earnings before interest, taxes, depreciation and amortisation (EBITDA), as percent of sales of goods, were down 1.4 points, to 6.1%, leading to an EBITDA contraction of 7.7%. As a result of this last change and given the impact of the group’s depreciations and financial expenses (both fixed costs), Label Vie’s net income was down by 39.3%, to Dh22.5m (€2m).

STRATEGIC DEVELOPMENT: In 2013, Label Vie sales should increase by 8.4%. This higher growth versus H1 2013 should result from the impact of new stores opened over the year – Dh268m (€23.8m) according to our estimates – and the expected sales recovery of existing stores thanks to a better evolution of household spending in H2 and to the favourable base effect related to the closing in H2 2012 (for two to three weeks) of three Metro stores for their conversion into Atacadao stores. The EBITDA margin should decrease to 5.9% versus 6.2% in 2012, due to a higher contribution from Atacadao stores. Consequently, the net margin should stand at 1.7%.

In 2014, sales should grow by 14.5% to Dh7bn (€622m), driven by the positive trend in household spending, and the impact of new stores opened, which contributed Dh274m (€24.3m) from an additional 18,000 sq metres of space. The EBITDA margin should improve slightly (+0.1 points, to 6.0%), benefitting from the cost optimisation strategy launched by the group’s management in 2013.

We have a “buy” recommendation on Label Vie, with a target price of Dh1684 (€149.54) per share. In fact, current valuation levels may seem high but are justified by 1) the huge development potential of modern distribution in Morocco in the medium to long term (11 sq metres per capita in Morocco versus 40 in Turkey and 200 in Europe); 2) the firm’s aggressive development programme over the coming years through the opening of 18,000 sq metres of new stores a year, representing 15% of total surface area in 2013; 3) this business is mainly driven by domestic consumption, which is the main growth catalyst of the Moroccan economy; and 4) the positive impact of the launching of the Atacadao concept between 2012 and H1 2013 (hard discount business-to-business and business-to-consumer) on the group’s sales. This development will also allow Label Vie to improve its margins, given the group’s stronger negotiating position vis-à-vis its suppliers.