Equity Research Jerónimo Martins: introducing an alternative approach to the capital structure puzzle

The present document is the report on an Equity Research of Jerónimo Martins S.G.P.S., SA (JMT). JMT is international Group based in Portugal with over 230 years of know-how in the food business. This report issues a buy recommendation for JMT, with a 2023YE price target of €24.9/share, applying a DCF FCFF Sum-of-the-Parts approach to each segment. The valuation comprises an upside potential of 22% from the January 13th, 2023, closing price of €20.4, with medium-low risk. To support this analysis, other valuation methods were used. Also, the valuation was subject to sensitivity analysis to address its risk. This research work presents an extended chapter aimed at integrating alternative methods to gauge the capital structure that investors require the firm to uphold for future growth opportunities. This is done by referring to foundational financial theory set by Modigliani-Miller for calculating the optimal capital structure, as well as the contrasting theory introduced by Stewart C. Myers. The section provides a new approach in calculating an implied capital structure by investors by using the Myers (1984) findings on present value growth options (PVGO), assuming those growth opportunities are a perpetuity of cash flows required by investors from the firms’ future project ventures.