Swedbank quick comment: Tallinn Department Store results

Photo: Stanislav Moshkov / Õhtuleht

Tallinn Department Store (TDS) released its Q4 results on February 12, showing a decline in EBITDA of 4% y/y and a decline in net profit of 6%. The results missed our estimates by 2.4% on EBITDA and 0.9% on net profit.

Although the results were close to our estimates, there were still some surprises. TDS reported a 27% gross margin in Q4, only slightly lower than the 27.2% margin of Q4 2011, which was the best figure since 2000. While in Q2 and Q3 TDS gave up more in gross margin due to competition, in Q4 the company was able to exceed our gross margin expectations. Consequently, gross profit rose by 6% y/y.

However, operating expenses were above our expectations, growing by 13% y/y. A part of this was explained by costs to open new stores in Q4, as the group opened 6 new stores in the quarter – two supermarkets, two shoe stores, one convenience store and one gourmet store. However, utility costs increased by 15% and marketing expenses by 37% y/y, offsetting the good result achieved on the gross profit line.

Most of the new openings were in the supermarkets segment, which therefore suffered the most on the EBITDA margin. While we estimate that the supermarkets segment EBITDA decreased partly due to declining gross margin, the effect was less than in Q2 or Q3.

Other segments were able to increase EBITDA, but mostly due to increasing sales. Department stores segment was the only segment that was able to increase its EBITDA margin, reaching the highest margin since 2008. A 49.5% y/y increase in the sales of cars segment resulted in just 0.5% growth in EBITDA
 

TDS spent EUR 5m on capex in Q4, of which EUR 2m was spent in the supermarkets segment, while EUR 2m was spent on real estate near Riga for the cars segment. Total capex for the year reached EUR 29m, roughly four times more than in 2011.

We increase our capex estimates for the coming years as well, as the group has announced more new openings. We therefore also increase 2013e sales to EUR 519m, a growth of 10.9% y/y. We also make slight changes to our margin estimates, expecting higher operating costs for the coming years, as marketing, utility and staff expenses are growing.

For 2013, we slightly increase our gross margin estimate due to the encouraging Q4 figure, but maintain our previous estimates for subsequent years. We keep our dividend estimate at EUR 0.30 per share, resulting in a dividend yield of 5.2%. TDS is trading at a 2013e P/E of 11.4x. We lower our target price to EUR 6.5 (EUR 6.7), but retain our Buy recommendation.

Recommendation: Buy

Target Price: €6.50

Risk Rating: Medium risk

Positives

o Strong consumer brand recognition as TDS is one of the highest quality domestic retailers

o Good diversification into different retailing segments helps counter cyclicality.

o TDS has invested into efficiency improvements during the past three years, resulting in near record margins for the company.

Negatives

o Competition is strong – many strong international players are in the Estonian market.

o Expansion possibilities in Estonian retail are scarce as market is small and saturated and competitors are still investing into growth.

o Domestic demand to remain weak in the coming years as coming out of recession is unlikely to be quick

Investment Risks

Low liquidity of the shares – many existing shareholders are unwilling to trade

Minority shareholders have a limited impact on company’s supervisory council and operations