Equity Research Jerónimo Martins SGPS, SA: Pricing Discount for Limited Liquidity in the Food Retail Industry

The present document consists of an Equity Research report on Jerónimo Martins SGPS, S.A. (JMT.LS). This report was used for the local Portuguese CFA Institute Research Challenge in which the team obtained the 1st place. Please note that this report contains solely public information until the 13/01/2023. Beyond the research presented during the competition, this report contains an additional analysis into the implied upside of the forecasted price of the company’s stock. That chapter intends to understand whether the difference between the forecasted price and the actual price of the stock is due to a possible lack of trading liquidity. The analysis is conducted by replicating the paper The pricing discount for limited liquidity: evidence from SWX Swiss Exchange and the Nasdaq, (Loderer and Roth 2005). The model of the paper is applied to historical data ranging for 10 years, with a data set comprised of Food Retail and Distribution Companies. The results indicate that liquidity is not a significant variable to estimate the valuation of these companies. Nonetheless, the calculated liquidity discount for Jerónimo Martins is far from the forecasted price discount, standing at 0.798%. JMT is a family-owned Portuguese Food Retailer, present in Portugal, Poland, and Colombia, mainly focused on discount-format stores. To value this retailer, a Sum-of-the-Parts approach was employed, where a discounted cash flow analysis was developed for each of the geographical segments, accounting for the supplemental segment. The valuation generated a buy recommendation with a price target of €24.9/sh for 2023YE, with an upside potential of 22% from the January 13th 2022 closing price of €20.4/sh, with a medium to low risk. To support the base case of the report, other methods such as Relative Valuation were applied. The company’s expansion plan to Romania was also considered as a real option.