Tokmanni Q1'25: Neutral valuation provides no incentive to bear risks

Translation: Original published in Finnish on 5/19/2025 at 7:10 am EEST.

Tokmanni's Q1 results were soft across the board, especially abroad, where the company's earnings level deteriorated despite a clear increase in sales. In our view, the stock's neutral valuation does not provide sufficient incentive to bear the risks associated with the negative profit warning, the acquisition integration and Dollarstore's trajectory. Thus, we lower our recommendation to Reduce (was Accumulate). The target price also falls to EUR 11.5 (was EUR 14.5), driven by lower forecasts and increased risk. 

Soft quarter by all accounts

Group Q1 revenue (342 MEUR) increased by 1%, driven by Dollarstore's growth. Dollarstore's growth (9%) was supported by moderately good like-for-like revenue growth and new stores. According to the company, the Tokmanni segment's revenue decreased (-2%) as a result of the Finnish strikes, the unusual timing of Easter and the mild winter. The operating result turned out to be weak (-11.2 MEUR), primarily due to internal challenges at Dollarstore. The company was forced to accelerate its destocking through clearance sales, which it deemed too aggressive, and this severely eroded its relative gross margin. Fixed costs also increased, driven by a growing store network and support functions, resulting in a segment result well below the comparison period.

Combining concepts more than anticipated

The group's original idea of having different concepts for Tokmanni and Dollarstore has changed somewhat. In the Q1 report, the company announced the "One Company" integration strategy, which aims to align the management model and sourcing between the concepts and build a joint concept. While deeper integration could boost the group's profitability, it also increases the lead time and risks associated with integration. There is a substantial degree of uncertainty, especially when it comes to implementing major concept changes because customers are accustomed to a specific shopping experience and/or product selection. Failure to do so would undermine the return potential of Dollarstore's store opening model and be negative for investors, given high valuation of Dollarstore’s acquisition relative to its current performance.

Increased level of risk in our view

Tokmanni reiterated its guidance indicating revenue of 1,720-1,820 MEUR and an adjusted EBIT of 100-130 MEUR for 2025. At the lower end, this equates to a result similar to that of the comparison period. Thus, to meet the guidance, the rest of the year must be stronger, as the result after Q1 is about 6 MEUR behind last year's result. We lowered our earnings forecasts significantly (15-20%) following the weak Q1 result. We have also adopted a more cautious stance on Dollarstore's earnings potential because earnings challenges tend to be prolonged, and progress has not met our expectations. We expect the company to reach the lower end of the guidance range (101 MEUR), assuming that the main earnings challenges disappear in H2. Therefore, the year 2025 carries the risk of a negative profit warning. Going forward, we forecast a 14% yearly growth in the group result, with improved profitability playing a major role as Dollarstore's revenue grows.

Share valuation neutral

We believe the stock's short-term valuation is elevated (2025e P/E 14x and IFRS-15-adj. EV/EBIT 14x), and our earnings growth forecast puts it at a fairly neutral level (2026e P/E 11x and IFRS-16-adj. EV/EBIT 11x). This would leave the expected return on the share dependent on a dividend yield of 5-7%, but this alone is insufficient to compensate for the required return (10%). The share is priced at a discount to its peers, but this is justified by their superior return on capital. The value shown by the DCF model (~EUR 12) is also indicative of a rather fairly priced stock. The neutral valuation of the stock does not provide sufficient incentive to bear the risks associated with successfully completing the integration process and evolving the Dollarstore concept. We will step back and monitor the company's development from the sidelines, as we currently view the stock's risk/reward ratio as weak.