On Wednesday, UBS began its coverage of Colruyt SA (COLR:BB) (OTC: CUYTF) stock, a leading grocery retailer in Belgium, with a Buy rating and a price target of €49.50.
The firm recognized Colruyt's position as the lowest price full-line grocer in the country, which supports its market leadership and is expected to contribute to a revenue compound annual growth rate (CAGR) of over 4% from FY24e to FY27e. This estimate surpasses the Visible Alpha consensus (VA Cons) of 3%.
The report highlighted Colruyt's cost-efficient operating model, which is likely to benefit from diminishing headwinds, leading to a structural expansion in midterm margins.
UBS's projections for the company's EBIT margin in FY25e and FY26e are 4.1% and 4.3%, respectively, which are both above the VA Consensus of 4.0%. The potential for Colruyt to regain its pre-COVID margin of over 5% was also cited as a possible additional upside.
Furthermore, UBS noted Colruyt's financial strategy, mentioning the divestment proceeds of approximately €900 million and a surplus of cash post dividends, which together provide about €1.3 billion for enhanced shareholder returns over the next three years.
The firm anticipates Colruyt will enact €800 million in buybacks during this period, although it acknowledged that the company's opportunistic buyback strategy might lead to higher special dividends instead.
The anticipated buybacks are expected to boost UBS's FY25e and FY26e earnings per share (EPS) estimates for Colruyt by 7% and 12%, respectively, ahead of the consensus.
Despite a strong share price performance, which has seen an increase of 45% over the last twelve months (LTM), UBS sees an additional 14% upside to the stock.
The new price target and optimistic outlook were set ahead of Colruyt's FY24 results, which are scheduled to be reported on June 11, 2024.
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