Puuilo extensive report: A prize specimen in discount retail

Translation: Original published in Finnish on 12/30/2024 at 7:50 am EET

Puuilo has continued its history of steadily gaining market shares despite the current challenging market situation. We feel the company has the potential to double its revenue in the long term, and its positive impact on earnings would act as a clear value driver for the stock. The expected return supported by earnings growth and dividend yield seems attractive. We reiterate our Accumulate recommendation and our EUR 11.5 target price.

A prize specimen in discount retail

Puuilo is a Finnish retailer specializing in cheap products. Its concept focuses on DIY needs, although the company also sells other, often rather defensive product categories. Throughout history, the company has grown strongly (2010-23 21% CAGR) and has done so profitably. Efficient operations in both stores and administration have guaranteed the company clearly higher profitability than its competitors. Rapid growth has also been reflected in market shares, as over the past five years the company has doubled its share of the Finnish discount trade market (10% in 2023). While growth has been abundant historically, the future still seems growth-filled for the company as the store network is still young and there is still room for several Puuilo stores in Finland.

An ambitious growth strategy

Puuilo’s strategy aims at clearly increasing its market share through a maturing and growing store network. In addition to growth, the company also aims to improve its already excellent profitability. Based on our calculations, Puuilo still has an additional revenue potential of up to 700 MEUR when we compare today’s company to its potential mature version. We are, therefore, fairly confident about the strategic objectives, although we recognize factors in the market  that slow down the company’s development. These include tightening competition in the Nordic countries, as several players expand their store networks. On the other hand, the company has navigated better than its competitors in the current challenging and highly competitive market, which increases our confidence in Puuilo’s value-creation potential also in the future. The company's profile after the strategy period is still unclear, but it will either become a stable company generating high cash flow and profit distribution or a growing international discount retailer. Although the first option has a favorable risk profile for the investor, the second would raise the potential return to a completely new level. The 18% earnings growth we forecast is primarily driven by future store openings, improving comparable growth and gross margin, as well as a tight cost structure. A significant risk for earnings growth not materializing is the intensifying competitive landscape or a continued weak market situation.

A quality company with an attractive expected return

In terms of trailing earnings multiples (P/E 19x and IFRS16 adj. EV/EBIT 16x), the company is priced slightly above our comfort zone. However, this is justified as we expect the company to achieve strong earnings growth in the coming years, when multiples fall to an attractive level for a growth company (25-26e P/E 16 and 14x and IFRS16 adj. EV/EBIT 12 and 11x). Considering our earnings growth forecasts, valuation multiples that are slightly elevated on actual earnings, and a 5% dividend yield, the expected total return on the stock is around 15%. We find this level attractive, and it exceeds our WACC, which means that the stock's risk/reward ratio is favorable. The over EUR 12 value per share implied by our cash flow model also suggests upside and justifies a positive view of the stock. We see Puuilo as one of the highest quality companies in the sector, with a concept that has proven its competitiveness in both favorable and challenging markets.