Poland's Allegro is in pole position despite IPO frenzy
- It isn't cheap but it should stay elevated, given its long operating history and massive market share
- Index inclusion could add fuel to the fire – it could be added to MSCI by year-end
- We believe 'Baby Amazons' such as Jumia have a way to go, not least given the boost that Covid has given to e-commerce
Poland's Allegro is the latest 'Baby Amazon' (emerging market e-commerce player) to have listed and its IPO pop is the best in the e-commerce category.
The company is up by 82% in its first two days of trading. It now has a market capitalisation of US$20bn, making it the largest company on the Polish stock exchange.
Allegro has 10.3mn active users and 130,000 merchants – it has a tight grip on Polish e-commerce, where it competes favourably with Amazon.
Investors have gone wild over the listing and it was priced at the top end of the valuation range. However, they should recognise that the wind is behind Allegro and the other Baby Amazons.
1. Not cheap but will stay elevated
Allegro is now at more than three times the industry average on EV/sales. It is also at a vast premium on P/sales (see chart).
However, Allegro has a number of features that support a premium:
It has been operating for 20 years – its peers such as MercadoLibre, Shopee and Jumia have much shorter operating histories;
Its market share is almost 50% – other Baby Amazons tend to that play second fiddle in their core markets; and
Its FY 19 EBITDA margin (46%) is very strong because of its incumbency.
2. Index inclusion could add fuel to the fire
Allegro was added to Warsaw's WIG20 index yesterday and could be added to MSCI by year-end. MSCI inclusion could add a wider canvass of EM investors to the name.
3. Covid-19 has been a friend to the Baby Amazons
Allegro's surge is a reflection of the general excitement for e-commerce, with online shopping turbocharged by the pandemic. One notable example is MercadoLibre, Latin America's e-commerce group, which is up 84% YTD. GMV has risen sharply for Baby Amazons across the board, as have share prices (see chart).
4. Baby Amazons have a way to go
We are bullish on the Baby Amazons, with the perhaps the prime example being Jumia. The company could surge on the back of Covid-19 and its cost controls.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...