Tokmanni Q2'24: Earnings potential to be proven in 2025-26

This report is a summary translation of the report “Tulospotentiaali todistetaan vasta 2025-26” published on 8/19/2024 at 7:55 am EEST.

Tokmanni's Q2 result was soft in many respects, as indicated by the profit warning issued by the company in July. During the quarter, the company faced challenges in each of its markets, resulting in a decline in like-for-like sales. This, together with cost pressures, resulted in the Group's profitability being lower than in the comparison period. The recently revised guidance was naturally repeated and the company's outlook for the rest of the year looks challenging to us. We consider the valuation of the stock to be quite moderate and believe that the stock offers investors a sufficiently attractive risk/reward ratio to compensate for the market uncertainties. We reiterate our Accumulate recommendation and EUR 13.0 target price.

Organic drivers for revenue growth few and far between

In Q2, Tokmanni Group’s revenue grew by 33% to 422 MEUR. Growth was effectively driven by inorganic growth from the Dollarstore integration, while revenue declined in comparable stores due to what management described as a delayed spring, weak consumer purchasing power and challenges with the Dollarstore assortment. Gross margin remained at a reasonable level, although we expected it to have suffered from the downward pressure of price competition in the market. This may reflect an improvement in the gross margin from the realization of cost synergies. Fixed costs rose faster than revenue, driven by higher personnel, marketing and real estate costs. Consequently, the Group's adjusted EBIT decreased from the comparison period to 28 MEUR (6.6% of revenue). With lower profitability than in the comparison period and higher financing costs, earnings per share also fell below the comparison period, but were in line with our forecast.

Rest of the year set to be challenging

Challenges with product mix and customer visit development will, in our view, continue to slow Dollarstore's performance in Q3, and the Finnish VAT increase combined with Tokmanni's aggressive price campaigns will weigh on the Finnish operations' earnings development. We forecast the group's 2024 result to be in line with the comparison period and at the lower end of the guidance range. Hope for an improvement in the group's earnings is provided by an improving gross margin as a result of increasing volumes of shared products in Q4. As for the market itself, we do not expect a major turnaround, but believe that it will only wake up in 2025 as consumer purchasing power improves. We believe the key to Tokmanni Group's investor story is to realize its growth potential and improve profitability in Sweden and Denmark. In addition, the company must prove the viability of the Tokmanni concept and also improve its efficiency, in addition to achieving reasonable comparable growth. The recent sluggish earnings development, profit warning and news on the competitive landscape in the market raise our concerns about the business potential.

Current share price does not reflect potential for earnings improvement

We believe that Tokmanni's valuation is moderate (2025e P/E 10x and IFRS16 adj. EV/EBIT 9x). Expected returns above the required return are driven by our forecast of 5% earnings growth, a 6% dividend yield and a gradual increase in valuation multiples towards the Nasdaq Helsinki average. The company's recent performance raises uncertainty about a sustainable earnings level, but we believe the current share price already provides investors with a sufficient margin of safety to offset temporary market challenges. This hypothesis is also supported by our cash flow model, which suggests a fair value of around EUR 14 per share. Over the long term, the stock has significant return potential if the company can continue to grow and improve its relative profitability even slightly.