Store Expansion And SPAR Deal Will Strengthen Future Market Position

Key Takeaways

• Tokmanni's strategic expansion and private-label focus aim to boost revenue and improve margins, enhancing overall profitability.
  
• Synergy savings and the SPAR collaboration should reduce costs and strengthen competitiveness, countering challenges like increased freight costs.
  
• Increased freight costs, low consumer confidence, and aggressive discounting strategies could negatively impact Tokmanni Group Oyj's profitability and revenue growth amid economic uncertainties.

Catalysts

Operates as a discount retailer in Finland, Sweden, and Denmark.

• Tokmanni Group plans to heavily expand its store network, adding new stores, especially in Sweden and Denmark. This strategic expansion is expected to drive increased revenue.
  
• Synergy savings resulting from the Dollarstore acquisition have already reached €13.3 million, with more potential savings anticipated. These synergies are expected to improve net margins by reducing costs and improving efficiencies.
  
• The collaboration with SPAR is anticipated to enhance Tokmanni's competitiveness in the grocery sector and improve gross margins by reducing purchasing costs through joint buying and access to SPAR's product range.
  
• Tokmanni's gross profits were negatively impacted by higher freight costs in 2024; however, negotiations for better sea freight terms are underway, aiming to start from April 2025. This effort should improve earnings by restoring gross margin levels.
  
• An increased focus on the introduction and proliferation of Tokmanni's private labels in Dollarstore segments promises revenue growth, while also potentially improving net margins due to the higher profitability of private-label products.

Tokmanni Group Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tokmanni Group Oyj's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 4.5% in 3 years time.
• Analysts expect earnings to reach €88.8 million (and earnings per share of €1.51) by about May 2028, up from €48.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 16.9x today. This future PE is lower than the current PE for the GB Multiline Retail industry at 36.4x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Tokmanni Group Oyj Future Earnings Per Share Growth

Risks

• Increased freight costs and logistical challenges, particularly those related to the Red Sea and surcharges, may negatively impact gross margins and overall profitability for both Tokmanni and Dollarstore. This had already added over €7 million in additional costs in 2024.
  
• Despite a strong increase in customer visits, the low consumer confidence and cautious purchasing behavior, especially in Finland, are affecting the average basket size and could continue to suppress revenue growth.
  
• The aggressive campaigns and discount-driven sales strategy, while boosting customer visits, have led to lower gross profit margins, which might continue to affect net margins if such strategies are prolonged.
  
• The transition from wholesalers to direct imports at Dollarstore, while potentially advantageous in the long-term, has led to higher inventory levels. This shift increases the risk of inventory obsolescence and impacts cash flow if customer demand does not align with stocked products.
  
• Economic and geopolitical uncertainties, including inflationary pressures and potential changes in consumer confidence, particularly in Finland, present significant risks to both revenue and earnings targets. These uncertainties have led to a cautious sales and earnings guidance for 2025, suggesting potential pressure on future growth projections.

Valuation

• The analysts have a consensus price target of €15.0 for Tokmanni Group Oyj based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €17.0, and the most bearish reporting a price target of just €13.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €88.8 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 9.9%.
• Given the current share price of €13.89, the analyst price target of €15.0 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.