Tokmanni: Market confidence pushed down

This report is a summary translation of the report “Markkinoiden luottamus painettu alas” published on 8/8/2024 at 8:50 am EEST.

Tokmanni will release its Q2 results on Friday, August 16 at around 8:00 am EEST. We lowered our forecasts following the recent profit warning. The rest of the year looks challenging for the company and the rest of the retail sector as consumer spending remains selective and the critical low price point for discount retailers is threatened by the VAT increase in Finland in September. We reiterate our Accumulate recommendation as the expected return on the stock remains attractive but lower our price target to EUR 13.0 (was  EUR 15.0) in the wake of forecast changes driven by a challenging market environment. In our view, Tokmanni's stock offers the over-the-cycle investor a sufficiently attractive expected return to offset short-term market challenges.

Q2 preview: Eyes on segment-level numbers, competitive landscape and outlook

Tokmanni reported preliminary operating figures for Q2 in the profit warning and therefore the added value of the reported figures will be lower than usual. Revenue in Q2 increased by 33% year-on-year to 422 MEUR, mainly supported by the Dollarstore acquisition. EBIT amounted to 27.8 MEUR, representing 6.6% of revenue. The company did not disclose segment-specific figures, but we estimate that growth in the Finnish operations was sluggish. On the other hand, the delayed spring mentioned by the company has also affected Sweden, which is also reflected in the figures reported by competitor Rusta. In addition, profitability was impacted by higher freight costs, which we believe include the additional costs of the Finnish port strikes that occurred in the first quarter. Overall, the Q2 operating numbers were in line with our expectations, but the profit warning and comments on the outlook for the rest of the year led us to be more cautious with our estimates. We expect adjusted EPS of EUR 0.24. We track segment-level figures in the report because visibility into Dollarstore's business has been limited and difficult to predict. We also draw attention to management's comments on the market and competitive situation and Tokmanni's outlook for the rest of the year, as we do not believe that achieving the new guidance is a foregone conclusion.

Profit warning and competitiveness concerns

Although our previous forecasts were broadly in line with the preliminary results reported by the company, we lowered our forecasts for the rest of the year and for the medium term based on the negative comments in the company's profit warning. In addition, several consumer-facing companies that have already reported their Q2 numbers have said they expect the rest of the year to be challenging. Previous expectations of a slight improvement in the consumer environment in H2 proved to be too optimistic. As a result, our medium-term earnings forecasts were reduced by an average of 17%. We also see signs of increased price competition in the market, and we see Tokmanni as one of the hardest hit. For example, there should be investment in price perception, which is an important element in discount retailing.

Expected return remains attractive despite market uncertainties

We believe that Tokmanni's valuation for the coming years 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 sustainable earnings levels, but this weighs more heavily on our scales than the low valuation. A stronger view on the stock would require more evidence from the company on Dollarstore's profitability turnaround and Tokmanni's improved competitiveness. Over the long term, the stock has significant upside potential if the company can continue to grow and improve its relative profitability.