Amazon Pressure And Iberian Risks Will Compress Margins

Key Takeaways

• Intensifying competition from global e-commerce and demographic headwinds threaten Sonae's revenue growth and margin improvement in its core European markets.
  
• Rising regulatory, supply chain, and inflationary costs will pressure profits as continued Iberian reliance limits meaningful risk diversification and new earnings streams.
  
• Diversified expansion, market share gains, and operational improvements across core businesses position Sonae SGPS for sustained growth and enhanced long-term profitability.

Catalysts

Engages in retail, real estate, telecommunications, financial services, and technology businesses.

• The persistent rise of global e-commerce giants and digital-native competitors such as Amazon is placing sustained pricing and margin pressure on Sonae's core brick-and-mortar businesses, particularly in electronics and grocery, which threatens long-term revenue growth and will likely limit improvement in net margins even if top line expansion continues.
  
• Exposure to demographic shifts and population aging in key European markets leaves Sonae heavily reliant on regions where consumer spending growth is expected to slow, reducing the company's addressable market size and placing a ceiling on future like-for-like sales and consolidated turnover growth.
  
• Heightened environmental and social regulation risk requires materially higher investment in supply chain and store operations to maintain compliance, which could offset efficiency gains and compress underlying EBITDA margins across multiple banners.
  
• Continued dependence on the Iberian Peninsula for the majority of its revenue exposes Sonae to regional economic stagnation and market saturation, making international expansion less impactful in diversifying risks or providing meaningful new streams of earnings growth in the medium term.
  
• Ongoing supply chain instability and persistent inflationary pressures, evidenced by the rising logistics and staffing costs seen at Worten, are likely to remain a drag on profitability, limiting operating leverage and constraining free cash flow generation across the group in the coming years.

Sonae SGPS Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sonae SGPS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sonae SGPS's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.3% today to 2.4% in 3 years time.
• The bearish analysts expect earnings to reach €272.5 million (and earnings per share of €0.13) by about August 2028, up from €252.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 9.9x today. This future PE is lower than the current PE for the GB Consumer Retailing industry at 15.6x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.01%, as per the Simply Wall St company report.

Sonae SGPS Future Earnings Per Share Growth

Risks

• Sonae SGPS has demonstrated strong organic growth across core businesses, with consolidated turnover increasing 24% year-on-year and underlying EBITDA improving by 38%, which, if sustained, could support higher revenues and improved operating margins in the long term.
  
• The company is actively expanding and diversifying its portfolio, particularly in defensible and growing sectors such as pet care (Musti, Pet City) and health and wellness (Druni, Arenal, Wells), positioning itself to benefit from secular growth trends and potentially reducing revenue concentration risk.
  
• Multiple business units are gaining market share in their core geographies-Continente in grocery, Druni in health and beauty, Worten in electronics, and Musti in the Nordics-while also seeing improving like-for-like sales, indicating persistent top-line resilience and the ability to outperform the broader market.
  
• Sonae continues to improve efficiency and optimize its cost base through scale, operational improvements, and technology investments, as evidenced by increased EBITDA margins in grocery and health and beauty and effective responses to temporary cost spikes, suggesting future net margin enhancements.
  
• Real estate and technology segments (Sierra and Bright Pixel) are contributing to net asset value and cash flow through portfolio growth and asset revaluations, and stable dividend policies point to a healthy and diversified cash-generating profile, which could underpin long-term earnings growth and support the share price.

Valuation

• The assumed bearish price target for Sonae SGPS is €1.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sonae SGPS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €1.8, and the most bearish reporting a price target of just €1.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €11.6 billion, earnings will come to €272.5 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of €1.29, the bearish analyst price target of €1.2 is 7.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.