Equity Analyst, LightStream Research

Oshadhi Kumarasiri

An equity research analyst with over 7 years of experience in multiple sectors. Previously worked for one of the world's largest asset managers with about USD2.5trn in AUM, covering small and micro-cap companies in the consumer sphere across Europe and developed Asia. Also experienced in covering multiple industries including banking, insurance and asset management, retail, tech, telco and REIT.

Equity Analyst

Don Quijote: 3QFY2019 Results, Revenue Falls Short While OP Exceeds Consensus Estimates

Pan Pacific/Don Quijote: Bringing Joy into Shopping

Pan Pacific International: UNY Acquisition the Bright Spot as SSS and Inbound Decelerate

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

Grocery Outlet Holding Corp / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/grocery-outlet-holding-corp" target="_blank" data-smartkarma-citation="entities:28129:1">Grocery Outlet Holding Corp (GO US)</a> is an extreme value retailer, predominantly based out of the west coast of the US. As of March 2019, the company operated more than 320 extreme discount stores across six states in the US, out of which over 90% of the stores were situated on the western coast with California dominating with more than 50% of the total store count.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/543/original/1.png?1560854830" class="editor-image img-responsive" data-smartkarma-image-id="90543"></figure><div class="content-caption">Source: Company Disclosures</div><p>The company uses an “Independent Operator” model which is somewhat similar to a franchise model or a licensing model. Under this scheme, the company enters into an independent operator agreement which gives the license to an independent operator to open up a Grocery Outlet Bargain Market retail store. Both parties invest in the store opening and generally share the gross profit of the store on 50:50 basis.</p><p>A Grocery Outlet store has about 5,000 SKUs at any moment. These include the perishables like dairy, fresh meat and seafood, premade food and florals to non-perishables like groceries, health and beauty care products, frozen food, beer and wine.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/090/544/original/2.png?1560854891" class="editor-image img-responsive" data-smartkarma-image-id="90544"></figure><div class="content-caption">Source: Company Disclosures</div><p>The company depends on deep discounts to attract customers. For most of the products Grocery Outlet generally provides about 40% discounts relative to the prices of day to day grocery shops. Furthermore, discounts at Grocery Outlet are even higher than the leading discount stores in the US as the prices at Grocery Outlet are about 20% cheaper than the discount stores.</p><p>On the other hand, the company does not have a presence in e-commerce, despite the strong trend towards e-commerce in the US retail space. The company believes in providing an experience to its customers which in return will drive foot traffic to their stores. Thus far the strategy has worked well and the treasure hunt like experience the company provides its customers has been received well.</p><p>On the back of this success, the company intends to accelerate its growth. Thus, they intend to pay off a part of the debt burden through raising about $250m in net proceeds through an IPO on the NASDAQ. The reduction of debt is expected to result in reduced interest expense, which in return provides additional room/funding for organic expansion.</p><p>The company is expected to start trading towards the end of the week, with an EV of about $1.9bn- 2.0bn, and although it may seem expensive on the surface, it is important to look at the longer-term prospects for the company. Once long-term growth prospects are factored in, we feel Grocery Outlet could be one of the cheapest retail stocks in the market.</p><table class="table table-striped"><tbody>
<tr>
<td>Price Range</td>
<td style="text-align: right;">$ 15.00 - 17.00</td>
<td></td>
</tr>
<tr>
<td>Shares Issued</td>
<td style="text-align: right;">17.2</td>
<td></td>
</tr>
<tr>
<td>Share Count Post IPO</td>
<td style="text-align: right;">85.7</td>
<td></td>
</tr>
<tr>
<td>Use of Proceeds</td>
<td colspan="2"> Repayment of Long-term Debt</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td></td>
<td style="text-align: right;"><strong>Low</strong></td>
<td style="text-align: right;"><strong>High</strong></td>
</tr>
<tr>
<td>Gross Proceeds in $m</td>
<td style="text-align: right;">                   257.8</td>
<td style="text-align: right;">                   292.2</td>
</tr>
<tr>
<td>Market Cap in $m</td>
<td style="text-align: right;">1,285.6</td>
<td style="text-align: right;">1,457.0</td>
</tr>
<tr>
<td>Net Debt in $m</td>
<td style="text-align: right;">602.2</td>
<td style="text-align: right;">577.9</td>
</tr>
<tr>
<td>EV in $m</td>
<td style="text-align: right;">1,887.8</td>
<td style="text-align: right;">2,034.8</td>
</tr>
<tr>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td><strong>Implied Multiples- FY2018</strong></td>
<td></td>
<td></td>
</tr>
<tr>
<td>EV/EBITDA</td>
<td style="text-align: right;">12.3x</td>
<td style="text-align: right;">13.2x</td>
</tr>
<tr>
<td>EV/EBIT</td>
<td style="text-align: right;">17.5x</td>
<td style="text-align: right;">18.8x</td>
</tr>
<tr>
<td>P/E</td>
<td style="text-align: right;">26.1x</td>
<td style="text-align: right;">29.5x</td>
</tr>
</tbody></table><div style="text-align: center;" class="content-caption"><em>Source: Company Disclosures &amp; LSR</em></div>

Grocery Outlet Holding Corp (GO US) is an extreme value retailer, predominantly based out of the west coast of the US. As of March 2019, the company operated more than 320 extreme discount stores across six states in the US, out of which over 90% of the stores were situated on the western coast with California dominating with more than 50% of the total store count.Source: Company DisclosuresThe company uses an “Independent Operator” model which is somewhat similar to a franchise model or a licensing model. Under this scheme, the company enters into an independent operator agreement which gives the license to an independent operator to open up a Grocery Outlet Bargain Market retail store. Both parties invest in the store opening and generally share the gross profit of the store on 50:50 basis.A Grocery Outlet store has about 5,000 SKUs at any moment. These include the perishables like dairy, fresh meat and seafood, premade food and florals to non-perishables like groceries, health and beauty care products, frozen food, beer and wine.Source: Company DisclosuresThe company depends on deep discounts to attract customers. For most of the products Grocery Outlet generally provides about 40% discounts relative to the prices of day to day grocery shops. Furthermore, discounts at Grocery Outlet are even higher than the leading discount stores in the US as the prices at Grocery Outlet are about 20% cheaper than the discount stores.On the other hand, the company does not have a presence in e-commerce, despite the strong trend towards e-commerce in the US retail space. The company believes in providing an experience to its customers which in return will drive foot traffic to their stores. Thus far the strategy has worked well and the treasure hunt like experience the company provides its customers has been received well.On the back of this success, the company intends to accelerate its growth. Thus, they intend to pay off a part of the debt burden through raising about $250m in net proceeds through an IPO on the NASDAQ. The reduction of debt is expected to result in reduced interest expense, which in return provides additional room/funding for organic expansion.The company is expected to start trading towards the end of the week, with an EV of about $1.9bn- 2.0bn, and although it may seem expensive on the surface, it is important to look at the longer-term prospects for the company. Once long-term growth prospects are factored in, we feel Grocery Outlet could be one of the cheapest retail stocks in the market.

Price Range
$ 15.00 - 17.00



Shares Issued
17.2



Share Count Post IPO
85.7



Use of Proceeds
 Repayment of Long-term Debt













Low
High


Gross Proceeds in $m
                   257.8
                   292.2


Market Cap in $m
1,285.6
1,457.0


Net Debt in $m
602.2
577.9


EV in $m
1,887.8
2,034.8







Implied Multiples- FY2018




EV/EBITDA
12.3x
13.2x


EV/EBIT
17.5x
18.8x


P/E
26.1x
29.5x

Source: Company Disclosures &amp; LSR

Pan Pacific International Holdings (7532 JP)

グローサリー・アウトレット・ホールディング・コーポレーションのIPO：それほど大きくない割引価格の超ディスカウントストア