Tokmanni Q3'24: Confidence in earnings turnaround strengthened

Translation: Original published in Finnish on 11/18/2024 at 7:52 am EET.

Tokmanni's Q3 results exceeded expectations and reinforced our confidence in the 2025 earnings growth turnaround. Increased consumer confidence was reflected in higher footfall in the Group's stores, which we believe sets the stage for a successful holiday season. With positive forecast changes, our target price rises to EUR 14.0 (was EUR 13.0). At the same time, we raise our recommendation to Buy (was Accumulate) on the back of the low valuation of the stock and a stronger earnings growth outlook.

Stronger than expected quarter

Tokmanni Group's Q3 revenue grew faster than expected (14%) to 416 MEUR, supported by the acquisition of Dollarstore, new stores and slight like-for-like growth (0.8%). Customer volumes increased in both segments (Group 2.6% and comparable stores 1.4%), reflecting the success of the company's promotional and marketing activities. However, the positive impact of customer volume growth on revenue was limited by price-sensitive consumer spending, which reduced the Group's average shopping basket. The Group's Q3 EBIT of 29.5 MEUR exceeded expectations and represented a reasonably good margin of 7.1%. The increase in EBIT was driven by higher volumes and costs growing at a slower rate than revenue. Tokmanni's EBIT margin was flat year-on-year at 8.3%, while Dollarstore's (acquired mid-Q3’2023) profitability improved to 4.6%, which we estimate would have been better without the discount campaigns on discontinued products.

Guidance revised as expected, earnings growth outlook slightly improved

In connection with the report, the company revised its guidance for the fiscal year. Tokmanni expects its revenue to be 1,650-1,700 MEUR (prev. 1,650-1,730) and comparable EBIT to be 98-110 MEUR (prev. 98-118) for the financial year 2024. We believe the guidance ranges are achievable, but this will require a successful holiday season. We believe that the conditions for successful holiday sales are created by increased customer activity due to increased consumer confidence and Tokmanni's active measures to improve its marketing and price image. With the completion of the acquisition integration, Tokmanni will introduce direct sourcing and private label products in its Dollarstore stores, which, together with the market recovery, we believe will drive sales growth in Q4 and stronger in 2025. Longer term, the main growth driver will be the expansion of the Dollarstore store network, which the company expects to remain strong in the coming years (~15 openings in 2025). In terms of value creation, the positive trend in sales needs to be translated into relative profitability, where we see the most upside potential outside Finland. In the report, we raised our profitability assumptions for Dollarstore, which is reflected in our 2025-26 net income forecasts as an increase of 2-3%. With the gradual increase in revenue, we expect the Group's adjusted EPS to grow at a CAGR of just over 7% (2023-26e).

We believe the valuation of the stock is low

We believe Tokmanni's valuation is very moderate (2025e P/E 10x and IFRS16 adjusted  EV/EBIT 9x) relative to the company's earnings growth prospects. The expected return is higher than the required return and consists of strong earnings growth, a good dividend yield and a gradual increase in valuation multiples. In our view, the current valuation of the stock would be justified if margins were to remain at their current level of around 6% and if revenue growth were to stagnate at the 1,800 MEUR set out in the financial targets. However, we believe the company should be able to improve relative profitability to 7% in the short term and 8% in the long term and continue to grow through the expansion of the Dollarstore network and comparable segment growth. Looking at the overall picture, we see significant upside in the stock. Our view is also supported by our cash flow model, which suggests a value of around EUR 14.5 per share and a valuation level that is significantly lower than that of peers.