Tokmanni - Delivering LFL growth

Despite adj. EBITDA miss Tokmanni’s Q3 report looked quite good overall, with solid LFL growth, upgraded guidance and stable gross margin. Sourcing did not improve, but work continues. More efficient sourcing remains key to our investment case in the mid-term. We think valuation looks attractive against the margin/sourcing improvement potential, and hence retain “Buy” rating with TP of EUR 9.

Continued LFL growth prompted a revenue guidance upgrade

Tokmanni delivered 4% LFL growth in Q3 vs. our 2% expectation, and thereby continued good performance from H1. Assortment improvements and investment in prices were mentioned as positive contributors, as earlier. Continued LFL growth improves trust on own actions yielding results and prompted a revenue guidance upgrade for 2018E.

Adj. EBITDA missed due to OPEX

Despite a sales beat adj. EBITDA missed estimates in Q3, driven by OPEX. Store refurbishments and changes to the store network burdened OPEX, which increased slightly as % of revenue in Q3 vs. decreased in H1. Management was not happy with the development and seeks to turn the trend.

More efficient sourcing remains key to our investment case

Tokmanni’s gross margin improved slightly in Q3 and was broadly as we expected. Yet the share of direct imports and PL products of sales was flat in Q3. More efficient sourcing remains key to our investment case in the mid-term, as without this Tokmanni is unlikely to meet the gradual gross margin improvement we have incorporated in our estimates for 2019-2020E.

Estimates largely unchanged – “Buy” retained, TP EUR 9

Our estimates remain largely unchanged after Q3. On our estimates Tokmanni is valued at par to its Nordic peers in FY19- 20E on EV/EBITDA, but at a discount on EV/EBIT and EV/FCF. Our DCF model yields fair value of EUR 11, but this is with a 6.5% terminal EBIT margin assumption that has not been reached historically – using 5% our DCF model would yield a fair value of EUR 9 per share (company has reached ~6% each year in 2013- 2016). We retain “buy” rating with TP of EUR 9.

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