Puuilo Q1'24: An exemplary performance in an unstable market

Puuilo’s Q1 report was strong as usual, driven by strong growth in customer numbers. Although the market environment remains unstable, the company has demonstrated its ability to grab market shares through a distinctive concept and cheap price image. Our growth forecasts for the next few years are driven by several annual store openings toward the target of 70 and sales growth in existing stores. The near-term valuation of the stock remains slightly elevated, but we believe this is justified by the strong earnings growth profile and high return on capital. We reiterate our Accumulate recommendation and raise our target price to EUR 11.5 (was 11), boosted by positive forecast changes.

The mantra continued: market shares grabbed with both hands

Puuilo recorded a 16% revenue growth in Q1, and revenue was 75.4 MEUR. This was quite well in line with our expectations and exactly in line with the consensus. The main growth driver was new store openings, including two converted Hurrikaani stores. Comparable sales increased by 5% and customer numbers by 7%, which we see as a good performance after a slightly more subdued Q4. The main profitability development driver was increased volumes and a slightly improved sales margin from the comparison period. Despite cost pressure, EBITA profitability we monitor at 8.3 MEUR (11% of revenue) was in line with expectations. EPS at the level of the comparison period (EUR 0.06) is explained by increased financing costs, which we estimate resulted from increased IFRS 16 liabilities (interest rate component).

Limited forecast changes, weak signals of improvement in the market environment

We made small forecast changes, mainly due to the better-than-expected Q1 and changes in the store opening forecasts of the year. In addition, we raised the forecasts for the next few years, e.g., driven by the favorable reception of Hurrikaani stores converted to the Puuilo concept. We believe the initial profitability levels in these are higher than in newly established Puuilo stores thanks to the existing customer base. Company management said that they see weak signals of market environment improvement and estimated that the market is currently bottoming out. We agree with this statement to some extent, as, e.g., construction retailers and wholesalers have reported that sales declines that have continued for a long time are slowing down. We estimate that the impact of future interest rate cuts on consumers’ purchasing power will not materialize until 2025, but these have a clear indicative value, e.g., for investment demand, which includes renovation and construction important to Puuilo. The pick-up in investment demand may already be visible in this financial year, but we do not rely heavily on this in our forecasts. We expect Puuilo to open 6 new stores in the current financial year and 5 in 2025, which together some 5% comparable growth will translate to an average revenue growth of some 13%. In our forecasts, EBITA profitability rises close to the targeted 17-19% range for the current financial year and reaches an average level of 17.5% in 2025-26.

Expected return is attractive

In terms of realized earnings multiples (LTM P/E 23x) the company is priced slightly above our comfort zone. However, this is justified as we expect the company to deliver strong earnings growth in the coming years, which lowers the multiples to more reasonable levels. We forecast Puuilo's result to grow at an annual rate of around 17% over the next three years. Given the 6% dividend yield and slightly elevated valuation level, the expected return on the stock is around 15%. We find this level attractive and it exceeds our WACC, which means that the risk/reward ratio is favorable.