Portobello SpA — Value appeal

Portobello was founded in 2016 with a key focus of developing a national presence for its Portobello-branded retail outlets over the long term, from its current base of 35 stores. Management has yet to elaborate on its definition of ‘national coverage’, but some competitors have over 700 stores in Italy, suggesting significant potential for future retail space growth. Portobello’s integrated business model is unique, in public markets, as it sources its products through a combination of media barter (own and third-party) and cash purchases more cost effectively than its competitors, enabling it to act as a price leader in its chosen categories. In addition to retail outlets, it sells to the consumer via marketplaces (eg Amazon). Beyond its consumer-facing activities, Portobello clears unsold inventory and sells other more opportunistic products not suited to Portobello’s retail outlets (eg cars) via its B2B business to other distributors. The acquisition of ePrice will enable Portobello to shift from a land-based focus to having an omni-channel presence.

Portobello’s FY22 results were ahead of our expectations from a profit perspective despite a slower roll-out of new Retail trading space than we anticipated, which is impressive given the more challenging economic environment. We have reduced our profit estimates for FY23 to reflect the lower FY22 Retail trading base, a slower space expansion as the company looks to manage working capital more tightly, and we eliminate prior estimates for new franchises. In Exhibit 1 we show how FY22’s results turned out versus our expectations, and our new estimates for FY23 and FY24. We forecast EBITDA growth of 13% in FY23 and 28% in FY24.

Portobello’s share price has been volatile over the last 12 months with a low of €15.9 and a high of €34.3. The recent retracement of the share price has brought the valuation back towards a significant discount versus an imperfect peer group. The prospect P/E multiples for FY23 and FY24 of 4.7x and 4.0x compare with the medians for the peers of 15.3x and 12.3x, respectively, despite Portobello offering better revenue and profit growth than the peers. We recognise that Portobello’s scale, liquidity and execution risk warrant a discount to the more-established peers.

Portobello is a young company with limited operating history, albeit good progress has been made already. Therefore the most apparent risk is management’s ability to execute the ambition to scale the business nationally while continuing to enjoy the benefits of the barter business model as it grows. The barter model includes non-cash transactions, which complicate the accounting. As a small consumer-facing company Portobello faces potential macroeconomic challenges and shocks that may affect consumer discretionary income, and a high level of competition from better-capitalised companies. The share has a limited free float, albeit that has been increasing (currently 35%).

Portobello was founded in September 2016 by four partners: Simone Prete (chief executive officer), Roberto Panfili (chief operating officer), and Stefano Caporicci and Luca Nardi (two investors who had no executive involvement). They recognised the ongoing changes in the retail market (increasing competitiveness), the changing purchasing habits of consumers (moving online and greater value focus), and the opportunity provided by the use of media bartering activities in helping to maximise the profit potential of a new retail format. The shares were listed on 13 July 2018 on the AIM Italia market with the issue of 444.3k new shares at a price of €4.4, raising gross proceeds of c €2m, to give a free float of 16.4%.

Portobello has a clear mission: to provide quality products at affordable prices, anytime, anywhere to consumers. The primary focus is to grow its retail activities to a national presence level (from a current base of 35 stores). At the time of the initial public offering (IPO) there was an aspiration to develop the business in other European markets, but we believe this is now unlikely in the medium term given the perceived opportunity in Italy.

Portobello sources branded products from its suppliers/clients through a combination of media barter (ie using the exchange of owned and third-party advertising inventory in return for the purchase of those goods) and cash purchases. The use of barter and third-party media enables Portobello to acquire goods at more competitive prices than its competitors, and, in turn, sell those products at lower prices than its competitors. Any residual stock that cannot be sold in its retail outlets as well as other more opportunistic product purchases are sold through its business to business (B2B) channel to commercial partners, typically at a significant (greater than 50%) discount to prices it achieves in the retail outlets.

The company has three strategic business units (Exhibit 3):

Portobello has demonstrated strong growth (Exhibit 2), with FY22 revenue of €129.9m and adjusted EBITDA (pre-exceptional media write-off) of €24.6m. Media has consistently been its most important revenue source, but Retail’s importance to the group should grow given management’s aspiration to increase its geographic presence.

In the following interview, Pietro Peligra, chairman of the board, provides an update on Portobello’s FY22 results and the near-term growth outlook.

As the barter business model is relatively uncommon in publicly listed equities, below we focus on the mechanics of the business, and how the transactions are reflected in Portobello’s financial statements, ahead of focusing on the activities of the individual business units.

The transactions with respect to the use of barter for the purchase of products acquired that are subsequently sold are shown in Exhibit 5.

The example shows the acquisition of goods valued at €100k by Portobello, in return for the sale of advertising valued at €100k. The goods are then sold through Retail at €120k. Depending on the cost of the media (zero/low cost if Portobello’s own advertising inventory or an indicated €20k if third-party media) the reported gross profit is either €120k or €100k, respectively. The key difference between this and the more typical cash purchase of goods is the use of an estimated market value of advertising inventory, in return for the goods acquired. Simplistically, at the group level, Portobello’s gross profit is the difference between the Retail selling price (€120k) and the cost of Media (€0–20k).

In the example above, Portobello’s Media business unit invoices the client for the imputed market value of the advertising, and the client invoices Media for the value of the goods; importantly, no cash changes hands. Portobello determines the imputed value of the inventory and associated advertising based on what it believes the products can ultimately be sold for. The Media revenue and associated cost are recognised as the advertising inventory is used/consumed. For Retail and B2B, there is no cost of goods sold as Portobello allocates all of the acquisition cost against Media, and there is no subsequent invoicing between Media and Retail or B2B. Under Italian GAAP, Portobello reports revenue and costs on a gross basis, so would recognise gross revenue of €220k (Media €100k and Retail €120k) and COGS of €100k (all Media), with no inter-company elimination. Management believes that under IFRS the company would report lower revenue and costs as these are netted off but would still report the same absolute gross profit. As an aside, this makes comparison of Portobello’s sales multiples versus its peers, which may report under IFRS, not meaningful.

In determining the purchase price of the goods from the client, and therefore the estimated value of media advertising revenue, the skill is in the knowledge of the product markets, specifically competitors’ pricing, and taking a view on the ultimate selling price, with the aim of being a price leader. Portobello is then able to determine a media strategy based on the client’s brand requirements, for example geographic focus or demographic target, and the value of media acquired.

Extending the company’s example above in Exhibit 5, below we demonstrate the potential variability of Portobello’s income statement depending on the source of products and channel sold through. In both examples we assume all media consumed is Portobello’s own (ie with a zero cost of sale).

Exhibit 6 shows Portobello’s financials if 100% of goods purchased via barter are sold in Retail at the same mark-up as Exhibit 5 (ie 20%), and the goods acquired for cash are sold in Retail at a higher mark up of 65%. For the goods acquired through barter, Portobello would recognise revenue of €440k and gross profit of €240k, a gross margin of 55%. The addition of goods acquired with cash and sold physically in the stores increases group revenue to €770k and gross profit to €370k, but the gross margin reduces to 48%.

In Exhibit 7, we change the assumption for the channel split of goods acquired through barter to 50:50 Retail:B2B, with goods sold in B2B at an 80% discount to the Retail price (and also a discount to the imputed value of the advertising inventory). For the goods acquired through barter, Portobello would recognise revenue of €340k and gross profit of €140k, a gross margin of 41%. The addition of goods acquired with cash increases group revenue to €670k and gross profit to €270k, a gross margin of 40%.

In all cases, the absolute gross profit for goods acquired through barter is equivalent to Retail plus B2B revenue less the cost of Media: €240k and €140k in the examples above. Naturally, Portobello’s revenue, gross profit and gross margin are maximised when it is able to sell a greater proportion through Retail than B2B. However, B2B fulfils a key role in that it enables a faster sell through than might be achieved elsewhere, which is beneficial for the timing of cash flow, albeit at a lower revenue and gross profit.

Management estimates that c 40% of its goods acquired for its own retail activities are acquired using barter, and goods for B2B are 100% sourced using barter.

As already highlighted, there are no cash flow implications on the initial invoicing between the client/advertiser and Portobello when barter is used to purchase goods. On the asset side of the balance sheet, the purchase of the inventory (goods acquired) is recognised when invoiced, and the advertising to be delivered is recognised as a deferred liability (deferred advertising income), which appears in creditors in Exhibit 15 (Financial summary). As the advertising revenue is delivered it is recognised in the income statement and the deferred income balance reduces. When Portobello contracts with a third-party media owner for the delivery of media, it recognises a prepaid advertising asset (equivalent to the value of the inventory acquired) and creditor for the value of the media acquired. As the media is consumed, the balance sheet asset is reduced and the expense of the media is recognised in the income statement.

At the end of an accounting reference period, as well as the physical inventory, Portobello’s balance sheet includes an asset for prepaid advertising (to be consumed) and a liability for deferred advertising income (advertising to be provided to the client). As these are both non or low-cash items and given the scale of the items, the movements can distort the working capital section of Portobello’s cash flow statement. The only media assets and liabilities for which there are cash flow implications are those with respect to the actual cost of third-party media, which management states is a small proportion of the rate card.

We believe Q4 is typically a seasonally important time of year for Portobello as its clients will have greater demand to sell unsold products as they approach the calendar year-end, therefore, according to management, Portobello’s physical working capital investment (inventory) is higher at the year-end than is typical through the year.

The advantages of the barter model to Portobello’s suppliers are:

The advantages to Portobello of the barter model are:

Portobello’s Retail activities include its own physical stores and the resale of products on other marketplaces (mainly Amazon). There is no internal e-commerce activity at present as management prefers to focus its marketing and promotion on developing its physical locations. The acquisition of ePrice (discussed below) will help Portobello to transition to an omni-channel presence. Management had anticipated it would begin the roll-out of franchise stores in FY22, however the increase in interest rates and the deteriorating macroeconomic backdrop have made it more difficult to attract franchisees and begin operating stores given the required upfront investment and uncertain trading outlook. Management’s preference is to cooperate with franchisees that have the financial resources to open a number of stores rather than just, say, one store.

The first Portobello store was opened in December 2016 and the first store in Rome followed in April 2017. The number of stores increased to 31 by the end of FY22 following the opening of 10 net new stores in the year and stands at 35 stores at the end of May 2023, with a geographic footprint for open and soon-to-open stores as shown below.

Management has an ambitious target to grow the store portfolio to a national presence, through a combination of company-managed and franchise stores, but the extent and phasing of the ambition has not been quantified. Portobello’s competitors, albeit all do not overlap in all product categories, have store portfolios that range in size from c 15 stores (Dmail) to c 80 stores (Satur) to Acqua e Sapone, Kasanova and Tigota, which have 600–800+ stores each, with various models (ie a combination of company-managed stores and franchises). Therefore, there appears to be a significant growth opportunity for Portobello.

In February 2021, PB Retail Srl (PBR) was established as the vehicle through which Portobello would accelerate its retail space expansion plan across Italy. Portobello owns 51% and the balance is owned by a commercial partner with strong expertise in apparel retail stores in shopping malls.

The original Portobello stores were conceived and developed as neighbourhood shops located in areas of high pedestrian footfall with a served population of over 100,000 inhabitants. The earlier stores typically have a trading footprint of 200–250 square metres (including on-site storage), but some of the more recent stores opened have been in shopping malls and have ranged in size from 1,000–2,250 square metres. Across the store portfolio, the format is the same but the number of stock keeping units (SKUs) across the product ranges varies.

Portobello’s product offer is typically of branded products that are slow moving for its suppliers, and therefore the suppliers are keen to monetise the inventory more quickly than otherwise might be the case. The core product categories, in descending order of sales, are: homewares (25%), electronics (25%), personal hygiene and home care (20%), clothing (15%) and other, including jewellery, gifts and food and beverages (15%). The brands offered include Samsung, Sharp and Singer. The brand owners do not place any restrictions on the level of discounts that Portobello can offer on the products. Management expects the product offer will continue to evolve including the likely addition of furniture (which is already being trialled in larger stores), vouchers (restaurants and hotels) and extending the food range in the near term. There are the usual seasonal changes in the offer, for example back to school and Christmas, but the number of SKUs by category through the year is relatively consistent. Portobello aims to be the price leader in all categories versus its competitors, instead of being a product leader (ie it does not carry the entire product range of a supplier, only those products that can be sourced cost effectively). With respect to product selection, the stores are restocked on a weekly basis with wider product rotations made on a monthly basis, and much greater seasonal changes made every three to four months. The stores do not target a specific demographic and there is no skew to lower-income customers.

In order to increase the recognition of the brand, Portobello advertises and promotes itself both through traditional means of communication (adverts, flyers, posters etc) and through the website. Each month, Portobello creates and distributes a flyer (manually within a 1km range of each store, electronically and a 3D replica flipbook version is available on the company’s website). The flyer typically promotes the best offers available on c 150 products. At the time of the IPO, the flyer was typically four to eight pages and has grown to 12 pages at the time of writing, as the store base and number of SKUs have increased. The May-June 2023 flyer included the following products:

The competitors (mentioned above) do not compete with Portobello across its entire product range. Acqua e Sapone’s offer is more focused on household care and personal care; Kasanova is focused on homewares, furniture, textiles and gift ideas; Tigota’s offer is more aligned with that of Portobello, although Tigota has a significantly higher representation in cleaning products and personal care; and Satur offers domestic appliances, table/kitchenware and home furnishings (including bathroom). In the majority of categories, Portobello also competes with local and national food retailers and online with Amazon.

Retail has generated strong revenue growth as space grew (number of stores and increase in average store size) and sales densities increased over the long term, with sales per average store being helped by the growth in space per store. The outbreak of the COVID-19 pandemic in early 2020 and subsequent operating restrictions are likely to have affected Retail’s growth rates versus management’s initial expectations.

FY22 represented the company’s greatest rate of store expansion since its IPO. Space growth in FY22 was lower than we had forecast in our initiation note; we forecast space of 28k sqm by the period end versus the achieved 24.5k sqm, and the company opened no franchise stores, versus our forecast 2.5k sqm of space by the period end.

We believe that stores that have been trading for more than 12 months reported positive like-for-like revenue growth in FY22, and the decline in FY22 sales densities (sales per average square metre) was solely attributable to the addition of new trading space, which takes two to three years to reach sales maturity.

We forecast continued strong growth in Retail sales of 60% in FY23 to €39.3m and 43% in FY24 to €56.3m from a combination of space expansion and improving sales densities. We assume a slower rate of space growth in FY23 than previously, with the addition of c 8k sqm of new trading space, due to the more difficult external operating environment before a higher rate of growth, and c 13k sqm of new space in FY24. With respect to store numbers, we assume the average store size of those added in both years will be equivalent to FY22’s average, c 1,150 sqm/store. Our previous forecasts included the addition of c 22k sqm of new trading space in FY23, and we also assumed the company would end the year with 20 franchise stores, which we have now eliminated from the model given the difficulties experienced in attracting franchise partners. The lower trading base of space from FY22 and reduced estimates for new space growth than our previous estimates translate to a reduction in our FY23 revenue estimate for Retail to €39.3m from €81.9m previously.

It is almost one year since Portobello announced the proposed acquisition of a 50% stake in ePrice Operations as a joint venture with Riba Mundo Tecnologia, a leader in the purchase and resale of electronic products in the B2B segment.

Management believes the acquisition will enable Portobello to become an omnichannel operator, shifting the core Retail activities from a store-based focus, and will enable it to grow ePrice’s core volumes (consumer electronics and household appliances) while adding complementary products from Portobello’s range to ePrice’s online offer. In addition, Portobello’s B2B activities (see below) are likely to experience incremental revenue growth as the joint venture will enhance the number of suppliers to which it has access.

At the time of the acquisition, the business was not investing in advertising, which was leading to declining traffic to the portal. Since being acquired, the business has been restructured and advertising has increased, which has led to growth in traffic to the portal and the company has negotiated direct supply arrangements with new international brands.

Management anticipates ePrice will contribute a small positive EBITDA in FY23. We include provisional estimates for a trading loss at the associate line (pre-tax) of €0.5m in FY23, which dilutes growth a little before increasing to a profit of €0.5m in FY24. In addition, the income statement includes an amortisation charge of €0.6m for the goodwill of the acquisition.

Portobello’s Media activities focus on the sale of advertising space in its proprietary (ie fully owned) media (magazines), partially owned media (five local newspapers), concessions (outdoor advertising in Rome and Milan) and Metro (free newspapers) in major cities including Rome, Milan and Turin, and in third-party media (Il Giornale, Forbes, Mediaset, RDS (radio), Mondadori, Gedi Group and Sky Italia).

The advertising is sold either for monetary consideration or, primarily, for barter (ie in exchange for products, which it subsequently sells via its Retail or B2B channels). Therefore, with zero/low cost to Portobello, the use of its own media for barter gives Portobello a competitive advantage versus its retail competitors. With respect to third-party media, management believes it has very good relationships with media owners and therefore gains high discounts to the rate card.

Portobello's publishing activities include a number of proprietary and licensed titles. Its sole focus is selling the advertising inventory, with functions such as printing and distribution outsourced. Content creation for the individual magazines is either done in house or outsourced.

Portobello entered the publishing market in 2018 with the February launch of ORA.IT WEEKLY, a weekly magazine with a focus on gossip and entertainment, and the May launch of LEI STYLE a monthly magazine dedicated to fashion and style, both in print and online. There followed three further launches in 2018 and one in 2019. VOI, a biweekly magazine with a broad demographic focus in the family segment, was launched in 2019. The number of publications has varied (six in FY19 including MONDO PET, ORA CUCINA and VOI NUOVA CRONACA). There are currently two magazines published, ORA and LEI STYLE.

In 2019 Portobello acquired 24.5% of Web Magazines Maker, which holds the exclusive Italian licence for Rolling Stone and Alfredo, a food and beverage magazine, under a rolling five-year licence.

In FY22, Portobello increased its own media exposure with the acquisition of daily newspaper LA Nuovo Sardegna, via its associate Sapere Aude Editori (SAE), and it subscribed €500k to the capital increase of Class Editori, which was subsequently written down to €259k.

Media has consistently been Portobello’s largest source of revenue; at €71.8m in FY22 it represented 55% of the group’s revenue. (Note that Publishing’s revenue was separately disclosed until it was subsumed into the wider Media business after H119.) Media’s revenue has grown in every six-month period since IPO, except H121 due to COVID-19 related lockdowns, as the inventory available has grown and Portobello’s client base has increased. Forecasting Media’s revenue growth is complicated as it is a function of the growth rates of Retail (above) and B2B (below), how much of Retail’s trading inventory is sourced with cash versus barter, and how much of the media consumed is sourced from the company’s owned versus third-party media.

All products sold through B2B channels are acquired through barter and sold to other commercial partners. Historically, the products sold through B2B were typically residual inventory (ie products not able to be sold through the other channels due to having higher inventory than the smaller store base, at the time, could sell). However, this has progressed to now include more opportunistic purchases of products that are not suitable for the retail outlets, for example cars and food and beverages, as well as remaining an outlet for residual retail inventory. Cars are only purchased after a resale channel has been identified. The cars are then retrieved from the seller and despatched to the buyer without passing through the Portobello warehouse. There is no inventory risk to Portobello and management believes the main benefit of the B2B channel is it improves the cash cycle by enabling it to get rid of excess stock quickly.

Management believes that the acquisition of ePrice Operations will enable it to enhance its B2B activities through wider sourcing of existing and new product categories.

Over the long term, B2B’s importance to the group’s financial results has been on a declining trend broadly, while demonstrating strong growth, and this should be expected to continue as Portobello’s Retail channel develops. This should be positive for the absolute level of sales and profitability from a group perspective, given products sold via B2B are typically at a significant discount to prices achieved in Retail. There are no stated key performance indicators for B2B, and management’s limited narrative typically highlights the activity as opportunistic.

Following two years of strong revenue growth in FY20 (27%) and FY21 (39%), there was a significant acceleration in B2B’s growth rate in FY22, increasing by 72% to €33.5m, thereby increasing the vertical’s importance to the overall group. With limited visibility given the opportunistic nature of the business, we forecast revenue growth of 20% in FY23 to €40.2m (from €25.7m previously due to the higher FY22 reported base €33.5m) and 10% growth in FY24 to €44.2m.

We believe the main sensitivities are:

Portobello undertakes related-party transactions that are concluded at arm’s length, with each transaction being reviewed by an internal independent committee. The related-party transactions are with companies connected to directors, former shareholders and equity-accounted companies. In FY22 the aggregate related-party transactions were sales (c €4.1m) and purchases (c €0.5m).

Portobello’s strategy of expanding the geographic footprint of its retail locations and the required media offer has produced significant growth in revenue and profitability since its IPO. Its cash flow generation reflects the ongoing working and fixed capital investment in expanding its business.

In FY16–22, Portobello’s revenue CAGR was 126%, with growth driven, in descending order of growth rates, by Retail (247%), Media (143%) and B2B (95%). The growing importance of higher-margin Retail to the group’s results has led to greater growth in EBITDA with a CAGR of 154% over the same timeframe, and the EBITDA margin increased to 18.8% in FY22 from 9.4% in FY16.

Portobello’s underlying profitability in FY22 was ahead of our expectations, despite the more difficult operating environment affecting revenue growth. Revenue grew to €129.9m (+52% y-o-y and versus our estimate of €137.9m), with underlying EBITDA of €24.6m (+49% y-o-y and versus our estimate of €22.2m) and operating profit of €19.9m (+43% yoy and versus our estimate of €19.0m). The EBITDA figure excludes an exceptional cost of €6.4m for media that was unfulfilled due to the supplier entering liquidation. Management is seeking to recover some of the amount that was written off. Despite the more challenging operating environment, there was a small increase in the EBITDA margin to 18.8% from FY21’s 18.7%.

Our revenue forecasts for the individual verticals have been covered in the prior sections. In aggregate, we forecast revenue growth of 41% to c €183m in FY23, a reduction from our previous estimate of €211m, and then 21% growth to €223m in FY24. In absolute terms, the greatest contributor to growth in our FY23 and FY24 revenue estimates is Media, followed by Retail and then B2B, but in percentage terms the greatest growth comes from Retail, followed by Media and then B2B.

In addition to revenue, Portobello reports ‘value of production’, which includes revenue and other non-trading income such as government grants and landlord refunds. The company quotes all margins with reference to value of production, so we will be consistent with this to aid the comparability of the narrative. The reported other revenue of €0.6m in FY22 was relatively immaterial relative to revenue of €129.9m, but has been higher in previous years when it represented c 2–3% of revenue.

We are more cautious about the outlook for gross margin in FY23 given the impact of inflationary pressures on cost of goods sold, and it is also influenced by the changes in the mix of the different verticals, which flows through to an expected reduction in the EBITDA margin to 15.1% in FY23 before our forecast that the margin expands to 15.9% in FY24. We forecast EBITDA growth of c 13% in FY23 to €27.8m (from €34.0m previously) and 28% growth to €35.5m in FY24.

Portobello’s effective corporate tax rate has varied from c 23% in FY18 to 37% in FY22, and we assume an effective tax rate of 35% in our forecasts.

The dynamics of the company’s business model, specifically the use of barter to partially fund the acquisition of goods for sale in Retail and B2B, were described earlier. The cash conversion cycle of barter is favourable as products acquired are sold before the advertising services are delivered over a longer timeframe.

There is also a high degree of seasonality as a greater proportion of advertising campaigns are typically delivered in the second half of a year than during the first half, and specifically the fourth quarter is more important than the third quarter, c 66% of FY22’s Media revenue was booked in the second half of the year. The weighting of trading to the second half of the year is also reflected in its Retail and B2B activities, with H222 revenues for each representing c 60% and c 57% of the full year results.

There was a notable increase in the working capital outflow to c €34m in FY22 from FY21’s €24m to support the almost doubling of Retail space during the year. The slower rate of space expansion in FY23 should lead to a smaller working capital outflow than in FY22.

With respect to capital investment, we assume that each new store requires capex of €300k, with an additional c 15% to help fund central investment to support the growth.

The most significant items on the balance sheet at the end of FY22 were the current assets of inventory of c €56m and accruals and deferred income of c €30m from a total net asset base of c €43m. The deferred income figure includes the prepaid advertising balance of c €27m.

Portobello’s growth has been mainly funded by taking on new debt with an increase in borrowings in most years since the IPO. These have been complemented by a €10m equity raise via a private placement in June 2021 at a share price of €41 following the 2018 IPO. The company’s gross borrowing increased by c €26m in FY22, taking its net debt position at the end of the year to €42.7m, or 1.7x FY22’s EBITDA, towards the low end of management’s targeted net debt/EBITDA position of 1.5–2.5x. Note, the company’s quoted FY22 net debt position of €42.4m includes the value of its investment in Class Editori.

As Portobello does not report using IFRS, lease liabilities are not capitalised and therefore its net debt position will appear low relative to other companies that have adopted IFRS. The non-capitalisation is also reflected in fixed and intangible assets of c €10m of the total asset base of c €114m at the end of FY22.

Our main valuation method for Portobello is a DCF as it captures the long-term growth potential as it expands its retail presence across Italy.

Our 10-year DCF-based valuation of Portobello has reduced to €91/share from €115/share previously. The reduction in valuation reflects a combination of the changed financial forecasts as highlighted above (predominantly a slower rate of Retail expansion and the elimination of estimates for franchising from the model), a lower WACC and the higher FY22 net debt position.

With respect to Retail, beyond the explicit growth in our new forecasts we assume the company reverts to our previous estimates of 20 new stores a year, taking the number of stores in FY31 to 189 (241 previously). In the absence of any progress with respect to exploiting the franchise opportunity, we feel it is prudent to eliminate this from our valuation of Portobello. We previously assumed 100 franchise stores by FY31 would contribute c 10% to Portobello’s Retail revenue at that time.

The change in our WACC to 11.5% from 12.5% previously is mainly due to the higher net debt position at the end of FY22. Our WACC includes a risk-free rate of 4.2%, a risk premium of 15% and a beta of 0.8 (source: Refinitiv). We assume a terminal growth rate of 2%.

Below we show the sensitivity of the valuation to different cost of capital assumptions and terminal growth rates.

Portobello’s unique business model in the public markets, with a combination of media and retail assets and the use of barter to source products, means there are no direct peers with which to compare its valuation. In addition, financial reporting under Italian GAAP rather than IFRS means that enterprise-value based multiples are not meaningful, given for example no capitalisation of lease liabilities. In addition, under Italian GAAP lease costs are expensed through the income statement, and EBITDA is lower than under IFRS.

Notwithstanding the above, below we show consensus estimates (source: Refinitiv) for sales growth and profitability and P/E multiples for a range of general merchandise and electrical retailers across Europe and the United States. The peer group is not perfect due to the range of product exposures and the relative maturities and scales of the businesses. We annualise the consensus estimates to Portobello’s December year end.

We can see that the weaker macroeconomic environment is affecting the growth outlooks of the companies, with negative or low expected revenue growth in 2023 leading to aggregate declines in EPS for the majority of the peer companies.

Our forecasts for Portobello’s revenue growth of 41% in 2023 and 21% in 2024 are significantly ahead of the consensus forecasts for the peers, with median growth rates of 4% and 5% expected respectively, due to Portobello’s relative immaturity in its growth cycle versus these companies. The higher sales growth is translating to significantly higher EPS growth in both 2023 and 2024 versus the expected consensus declines in 2023 before an expected return to growth in 2024.

While we recognise that Portobello’s valuation should reflect a discount to its larger peers given its free float, liquidity and execution risk, we believe Portobello’s prospective P/E multiples for 2023 and 2024 of 4.7x and 4.0x look low versus its peers given its relative growth profile.

We consider the US-listed peers to be less relevant for comparison given the greater size of their addressable market and market capitalisations versus Portobello. However, we note there is some product overlap in lower-priced goods such as homeware, house, personal care and food.