Warehouse And E Commerce Growing Pains Will Eventually Support Healthier Margins

Catalysts

About Meko

Meko operates automotive aftermarket wholesale and logistics networks across the Nordics and parts of Central and Eastern Europe, supplying parts, services and e-commerce solutions to workshops and end customers.

What are the underlying business or industry changes driving this perspective?

• The new automated central warehouses across Sweden, Norway, Denmark and Finland are now largely in place and designed to support high volumes. However, the fine tuning phase, double rents and transition costs risk delaying the full efficiency benefits, which could limit the improvement in EBIT margin and cash conversion.
• The company is expanding its e-commerce presence with the Mekster webshop across the Nordics to tap into growing online parts demand. However, stronger price competition from other online players may keep pressure on gross margins and restrict the uplift in revenue and earnings from this channel.
• Exclusive and private label brands such as Every Part Matters aim to capture more price sensitive customers and support pricing power over time. However, intense discounting in markets like Denmark and Poland may blunt the impact on gross margin and slow the recovery in group EBIT.
• The integration of Elit in Poland and ongoing branch consolidation are intended to improve scale efficiency and country mix. However, integration complexity and existing price pressure in Poland create a risk that margin dilution continues longer than planned and weighs on group earnings.
• The cost saving programs and headcount reductions of more than 500 full time employees by the end of Q4 are targeted to lift profitability. However, the current leverage of 3.6x and lower underlying EBITDA mean that any execution setbacks could limit improvement in net margins and slow the pace of deleveraging.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Meko compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Meko's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.2% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach SEK 748.3 million (and earnings per share of SEK 13.56) by about June 2029, up from SEK 43.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.1x on those 2029 earnings, down from 99.0x today. This future PE is lower than the current PE for the GB Retail Distributors industry at 21.3x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intense price competition across the independent aftermarket, particularly in Denmark and Poland, is pressuring gross margins and could persist if peers continue to chase volumes for supplier bonuses. This would weigh on revenue quality and EBIT margins over time.
• Leverage of 3.6x, combined with earlier heavy investment and a weaker EBITDA base, leaves less room for error if earnings do not recover as planned. This could constrain future investment flexibility and put pressure on net margins and earnings.
• The large warehouse automation program and ERP rollout are still in the fine tuning and transition phase, carrying temporary double rents, extra staffing and items affecting comparability. If these efficiencies take longer to materialize than expected, fixed costs could stay elevated, limiting improvement in EBIT margin and cash conversion.
• Integration work in Poland, including the Elit acquisition, branch closures and a major warehouse move, is occurring against a backdrop of strong local price pressure. If Poland remains a lower margin market for longer, the country mix effect could continue to dilute group gross margin and adjusted EBIT.
• Car owners have been deferring maintenance and focusing on only necessary repairs after a prolonged economic downturn. If consumer confidence and household finances remain subdued for an extended period, workshop volumes and higher value service work may stay soft, which would cap revenue growth and slow any recovery in earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Meko is SEK88.0, which represents up to two standard deviations below the consensus price target of SEK94.0. This valuation is based on what can be assumed as the expectations of Meko's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK100.0, and the most bearish reporting a price target of just SEK88.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK19.9 billion, earnings will come to SEK748.3 million, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 7.5%.
• Given the current share price of SEK76.5, the analyst price target of SEK88.0 is 13.1% higher.
• 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.