Puuilo Q4'24: Good momentum continues, but valuation is tight

Translation: Original published in Finnish on 03/28/2025 at 07:59 am EET

Puuilo’s Q4 result was record high, the guidance was strong as expected and shareholders were rewarded with an additional dividend. We still see strong prerequisites for business growth and value creation, but the stock's stretched valuation turns the short-term risk/reward ratio unfavorable for the investor. We reiterate our EUR 12.0 target price but lower our recommendation to Reduce (was Accumulate) after the price rise and higher valuation level.

Earnings rose to a record level in relative terms

In Q4, Puuilo's revenue increased by 12% to 86 MEUR driven by new stores. The number of customers increased in both new and old stores, which we believe indicates the competitiveness of the concept. Like-for-like sales, on the other hand, remained at the level of the comparison period, which, we suspect was due to the decrease in the basket. The basket has decreased as consumption has shifted towards lower price point products, including private labels, whose sales increased by almost 20%. In terms of earnings, the decline in the basket and the rise of private labels is favorable, as lower price point and private label products have higher margins. This, combined with good cost control, resulted in a positive earnings revision and a record-level Q4 result. The EBITA margin reached a record level of 16.6%, which we believe indicates that the company has successfully scaled its business in line with its strategy. The Board decided to propose an additional dividend of EUR 0.24 on top of the basic dividend of EUR 0.46 per share, which increases the dividend proposal for 2024 to EUR 0.70. A more generous distribution of profits is justified, as excess capital accumulates in the cash reserve year after year due to the strong cash flow and low investment needs of the business.

Guidance in line with expectations

Puuilo expects 2025 revenue to be 425-455 MEUR and EBITA to be 70-80 MEUR. We believe the guidance relies on an improving market environment in H2, which should create preconditions for a slight pick-up in like-for-like growth. Thanks to the efficiency measures implemented in 2024 (e.g. process automation), the margin should scale to some extent. However, we expect the five store openings in quick succession scheduled for H1 and wage inflation will keep the cost structure on the rise. We expect the cost pressures to outweigh the positive impact of efficiency measures and estimate the 2025e EBITA margin to weaken slightly to 17.3%. In our view, a clearer scaling of the cost structure requires a pick-up in like-for-like growth (~5%), which we estimate will happen in 2026 with the improving market environment. Thus, we expect 2026e EBITA% to increase to 17.6%, exceeding the company’s target level (>17%). Our estimates involve risk factors in both directions, but in our view, the risks to our long-term estimates that are in line with the company targets are more likely to be downward. These include, e.g., the possible failure of the main earnings growth drivers, i.e. store expansion and, in particular, like-for-like growth, in which case our estimates may prove too optimistic. Forecasts remain unchanged in the big picture

Expected return relies on dividends

We feel the short-term valuation of Puuilo's stock is stretched. With our 2025 estimates, the stock trades at 19x P/E and 15x IFRS 16 adj. EV/EBIT multiples. These levels are above our comfort zone, meaning that the 13% earnings growth we forecast will largely be used to digest multiples. In this case, the dividend yield (~6% p.a.) supports the expected return, but it is not enough to cover our required return (9%) on its own. With these parameters, the risk/reward ratio of the stock is too narrow in our papers. The challenging risk/reward ratio is also supported by the marginal upside of the current share price to the value of our DCF model (EUR 12.4). Although we see Puuilo as the highest quality company in its sector, the business creates value, and the share offers an expected return of over 10% in the long term, the safety margin protecting investors from uncertainties is almost non-existent at the current share price.