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12 March 2014

Summary company financials (m)


Year end December FY2011 FY2012 FY2013E FY2014E
Price 49.95 Revenue 255.7 335.1 427.0 532.5
Market cap (m) 338.3 36.7% 31.0% 27.4% 24.7%
Enterprise value (m) 334.4 EBITDA -7.4 -1.4 5.0 11.7
-2.9% -0.4% 1.2% 2.2%
Free float 50% Net income -6.0 -2.1 3.2 8.1
Net debt (cash) -7.5 -1.0 -3.9 -11.7
EV/Sales 0.89 0.58 0.78 0.61
EV/EBITDA -30.8 -141.2 67.3 27.9
PE -39.4 -91.9 106.1 41.6
0.21428571
zooplus AG
Revenue growth
EBITDA margin
Zooplus AG is currently the fastest growing pan-European e-commerce leader for pet food supplies. Its product range, which features over
8,000 SKUs, includes pet food as well as accessories, and the company sells to more than 23 European countries . Zooplus customers also
benefit from a variety of interactive content and community features, such veterinary advice and discussion forums.

Our research suggests Zooplus operates with attractive KPIs and a disruptive pricing model. The company has 2014E revenue of more than
500m, a market cap of 335m and a net cash position, valuing it at 0.60x Enterprise Value to Sales. This EV/Sales rating compares to our
assessment of its peer group trading at an average 2.8x EV/Sales. Whilst profitability at Zooplus is currently limited at group level, the
company achieves "high single digit" EBITDA margins from one third of its sales - in its most mature market of Germany. Our analysis
supports management's guidance that group profitability can also head to this level over the coming years, which, if achieved, would put
Zooplus on a single digit PE. Zooplus is 50% owned by Burda Investments, a division of Burda Media Group.

Zooplus offers next day delivery to customers by way of three central logistics hubs - in Germany, the Netherlands and Poland. According to
a study by Cologne-based ECommerce Centre (ECC), Zooplus ranked first in Germany as a quality and service leader, above Amazon.

Zooplus has been pursuing a growth orientated internationalisation strategy. This has enabled market leadership but with the deliberate
result of breakeven earnings. Zooplus buys directly from a range of more than 100 international suppliers, supplemented by Zooplus' own-
brand strategy within key product areas. Own brand sales are currently 10% of revenue, with a medium term goal to raise this to 20%.

Investors may query if Amazon poses a threat to Zooplus. Amazon, however, does not list the volume of pet food products as does a
specialist such as Zooplus, nor has pet food market share. Indeed, when we attempted a basket pricing analysis on Zooplus versus Amazon,
the exercise could not be completed due to Amazon's incomplete listings in this area. We see the petfood market of no real strategic
significance to Amazon, versus, say, digital products, and we would expect Amazon's incomplete efforts in this area to be indicative of its
future path.

Zooplus' two largest competitors - Pets at Home and Fressnapf - are high cost base, bricks-and-mortar-led retailers with online businesses
bolted on and lower online market shares than Zooplus. Zooplus uses disruptive pricing in all new markets and this includes in the UK
against incumbent Pets at Home. We found a simple basket of dog food, cat food, aquarium water pureifier and budgerigar seed to be 18%
cheaper at Zooplus.co.uk than at PetsatHome.co.uk. Pets at Home's higher cost base, with operating margins at 12%, leave it with little
options to address an 18% pricing imbalance. Zooplus grew UK revenue at 50% to 30m FY2013E versus Pets at Home's online revenue at
18m if we favourably annualise Q1 2014 as disclosed in the Pets at Home IPO prospectus.

In Germany, Zooplus competes with Fressnapf. Whilst Fressnapf has been more aggressive on price since 2012, our analysis still showed
the Zooplus basket to be 2% cheaper. Zooplus have stated that they make a "high single digit" EBITDA margin in the German market, which
they see as more mature for their business, although despite this their German operations are still growing at 13% per annum. Fressnapf is
a private company and its profitability therefore unclear.

The opportunity for Zooplus in its current markets remains significant, notwithstanding that the company has a successful track record of
entering new markets and may continue to do so in the future. Whilst Zooplus is already online leader in all its markets, its total market
shares remain low, at 1-4%. We see no reason why the company should not be able to target future growth.

Based on the progression of three 2013 quarters so far reported, we estimate Q4 2013 will show Zooplus at a 2% EBITDA margin. The
margin trend at Zooplus has been improving for several years, and current margins compare to a negative -3% EBITDA margin in 2011.
Zooplus continues to reduce its cost base as a % of sales and the company guides this can fall from 42% of sales in 2011 to below 30% going
forward. Whilst this may seem aggressive, much of the work has already been done and Q3 2013 disclosed a cost base of 32% of sales (and
a 1.8% EBITDA margin) versus 37% of sales for FY 2012.

We would see continuing margin improvement to occur over time as Zooplus' position in its markets matures, cost base improvements
continue, and additional logisitics centres increase delivery efficiencies. On the margin investment side, we see no reason for Zooplus to
undercut Pets at Home by a full 18%, except for to rapidly gain market share. As market share gains progress, we would expect pricing to
normalise. Management have stated that they see in all markets the same "high single digit" EBITDA margin potential as in Germany, but
that they first will grow the markets to get the logistics efficiency.

In the current FY2014, assume a 2% EBITDA margin, Zooplus trades at 0.60x Enterprise Value to Revenue and 42x PE. Such a PE rating may
seem too rich for traditional value investors. However, the earnings need to be considered at in the context of a company electing to take
market share by operating a break-even pricing strategy. Zooplus trades at an almost 80% discount to comps based on EV/Sales. As Zooplus
gradually matures and adapts its pricing strategy accordingly to match the "high single digit"let us say 8% EBITDA, that it currently achieves
in its core market of Germany, the PE ratio drops into single digits.