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Verkkokauppa.com - Estimates cut ahead of Q3

We cut estimates ahead of Q3 on anticipation of tighter competition. Peer multiples have also dropped notably since our latest update in mid-Aug. We conclude risk/reward is still not attractive enough, and keep “Hold” rating intact.

Revenue growth has been guided to improve in H2

Verkkokauppa.com reached only 3% revenue growth in H1 as wholesale volumes declined significantly compared to last year. Market growth was also limited in H1 at ~2%, according to GfK. We understand market growth in Q3 has offered no better tailwind than in H1. However, in H2 wholesale volumes should no longer give headwind as they have been guided flat in H2. We expect revenue growth to improve to 11% in Q3 from the 3% in H1, driven primarily by the new store in Raisio but also by slight underlying growth. Stronger growth has been guided for H2.

Competition seems to have intensified during Q3

Based on a talk with management intensity of competition seems to have increased during Q3 with more active campaigning by competitors. Verkkokauppa.com has repeatedly reminded that it stands ready to respond should pricing tighten and to use price as tool to speed up growth. We expect a modest gross margin of 14.1% in Q3, which is better than last year’s multi-year low of 13.1%, but slightly below 14.3% of Q2.

Raisio to continue burdening margins in H2

Verkkokauppa.com’s new store in Raisio had a somewhat disappointing start with higher than expected OPEX and slower than anticipated ramp-up. The company has stated it will continue to invest in prices and OPEX to boost the store in H2.

Estimates cut ahead of Q3 – “Hold” intact, TP EUR 4.5 (5.7)

We have cut estimates and expect Q3 revenue of EUR 117m with adj. EBITDA of EUR 2.6m. Our FY18E adj. EBITDA estimate is down by 6%. Corresponding FY19-20E estimates are down by 3%. Peer multiples for FY18-20E have also dropped by ~10-15% since our latest update in mid-Aug. We reflect lower estimates and peer valuation in our scenario analysis and conclude risk/reward is still not attractive enough, considering there is little room for disappointments in H2 for guidance to hold, and as the risk of Amazon remains an overhang on the stock.

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