Tokmanni Q1'24: Bumps in the growth story

Tokmanni's Q1 revenue was in line with our expectations, but the earnings level was disappointing due to the weaker than expected performance of the new DollarStore segment. Following the report, we have made some negative revisions to our forecasts and as a result we are revising our target price to EUR 15.0 (was EUR 16.0). We don't see much upside in the multiples, but the earnings growth we expect, combined with a good dividend yield, argues in favor of holding the stock. We reiterate our Accumulate recommendation.

Profitability was not as expected

Tokmanni’s Q1 revenue grew by 42% to 339 MEUR, which was in line with our expectations. The Finnish operations surprised positively, growing by 4.2% and 1.7% comparatively. However, DollarStore, which has a stronger growth profile, disappointed with a comparable revenue growth of 1.8%. Despite revenue at group level being in line with expectations, Tokmanni's comparable EBIT decreased to -5.1 MEUR in the first quarter, which was below our forecast of -2.7 MEUR. The Group's comparable gross margin increased to 34.0% from 31.7% in the previous year, making fixed costs the challenge for the quarter. Tokmanni segment’s profitability improved from the comparison period and exceeded our expectations, but DollarStore's Q1 result was weaker than anticipated. Stronger-than-expected seasonality in profitability may explain DollarStore's lower-than-expected profitability, but management also highlighted the weak demand environment and increased competition as factors limiting profitability. Based on management’s comments, the events in the Red Sea and the political strikes in Finland put pressure on profitability during the period, although their impact is more pronounced in Q2.

Guidance dependent on H2, success of DollarStore integration more critical to the story

With a softer-than-expected Q1 report, we lowered our 2024-2026 EBIT forecasts by 5-6%. Tokmanni reiterated its guidance for the current year in the report, but with Q1 profitability below our expectations and comments pointing to a soft Q2, our forecasts for the current year are quite close to the lower end of the guidance range. In terms of guidance, we expect the seasonally strong H2 to determine the game. We acknowledge the risk of a negative earnings warning, but from an investment story perspective, an earnings warning caused by political strikes and temporary challenges in the logistics chain would be relatively insignificant. More relevant to the 2024 performance level, we regard the integration of DollarStore, on which management's Q1 comments seemed positive. A key to the company's earnings growth in the coming years will be DollarStore's continued growth and improved relative profitability.

Valuation seems neutral

We see Tokmanni’s valuation level as quite neutral (P/E 2024e 14x). The multiples are slightly below historical levels, but we believe this is justified by the higher interest rate environment, which pushes up the required return. The company is priced around the upper end of the valuation range we have adopted, so the multiples do not provide much support for the expected return. Therefore, we see strong earnings growth as the main driver of the share's expected return. In addition, the EUR 15.8 value implied by our DCF model suggests that there is still room for upside. Tokmanni trades at a larger-than-usual discount to its peers, which provides some support to the valuation.