Tallinna Kaubamaja Group (TKM1T:TLX) is in the business of retail, wholesale trade and rental activity. The Group companies contribute more than one tenth of retail trade in Estonia, therefore it’s quite important to pay attention to the macroeconomic environment in Estonia. The Company operates in five business segments: supermarkets, department stores, footwear, cars and real estate. Most of the revenue comes from the fairly cyclical consumer driven segments supermarkets and department stores.
Macro and charting
Tallinna Kaubamaja main revenue comes from Estonia; therefore we should take a brief look at some macroeconomic factors that influence retail sales.
During
the aftermath of the 2008-2009 crises Estonia’s GDP had a good growth rate in
the years 2011-2012. After 2013 the growth rate has been slower and more
stable. Year-end growth rate figures have been positive since 2010. Positive GDP
growth in Estonia is probably going to continue at a similar or somewhat lower
rate.
Figure 1: GDP growth rate is positive for retail in Estonia, data source:
Statistics Estonia
Figure 2: Inflation is forcasted to rise
further in Estonia in 2017, source: Bank of Estonia
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Although
the average wage has been rising quite fast in the last few years (and with it
the wage costs for the company), the net effect is positive. As the average
wage rises, people have more discretionary income to spend at retail stores and
this drives revenue growth for the retail sector.
With
the macro environment generally supportive to retail sales, let’s move further
to take look at the company’s stock price movement.
Looking
at the stock price at the Reuters website, with dividend payments
enabled, one can see a clearly visible spike every year, which coincides with
the yearly dividend payment.
Taking into account that Tallinna Kaubamaja pays
dividends in April and the annual report is released at the end of January,
there seems to be a pattern emerging for a short term strategy. Looking at the
price change for the last five years between the first trading day of February
and the day before the ex-dividend date in April (Table 1), we can see that the
change is indeed positive for the last five years and over 10% for three of the
five years.
Table 1:
Price move after annual results and before the dividend payment
This type of change has a
very high change of reoccurring, if there is no major economic slowdown in the
next three months. Therefore this strategy might be considered for a short term
trade, if the stock has no major fundamental problems this year and the
dividend is not reduced. For a longer term trade it is better to wait for a
month or two after the dividend payment, as we can see from the stock chart. After
the dividend payment the stock price usually falls and that opens a buying
opportunity for the long term holder.
Fundamentals
The following analysis is
based on numbers from the Consolidated Interim Report for the fourth quarter
and 12 months of 2016 (unaudited), which is available at the Nasdaq Baltic website.
First, when looking at cash
flow it is good to see, that total cash flows is positive
18,4M, when comparing to a decrease in cash by 10,7M in 2015. This supports the
idea that dividends will be paid this year. The increase was mainly due to
larger operating cash flows, smaller investing cash flows (decrease in purchase
of property, plant and equipment)
and less cash used in financing activities (larger proceeds from borrowings).
Although the purchase of
PPE decreased, important investments were still made in the supermarket and
department store segments. They opened new Selver stores in three locations (and
closed only one) and additionally they renovated multiple stores. In case the
chosen locations are good, the stores will increase revenue and profit next
year. Also the Kaubamaja e-shop and e-Selver service expansion might benefit
growth in future years. The last 12 month cash flow supports the continuation
of the dividend.
Second, looking at the
financial ratios, for the 12 months, we see EPS increased
in 2016 to 0.63, compared to 0.54
a year ago. Revenue grew by 7.7%, operating profit
increased 17.6% and net profit increased 16.6%. ROE, ROA, the net profit margin
and gross profit margin all increased. The quick ratio rose and the debt ratio
remained the same, which is positive for the balance sheet. Overall the 12 month
financial ratios point to a continuation of the dividend or even a possible
increase.
The fourth quarter of 2016
shows a decline in operating profit and net profit, when comparing to the
fourth quarter of 2015. ROE, ROA, net profit margin and gross profit margin are
negatively affected. Although the company points out that the lower profit was
mainly due to revaluation of the Group’s assets, a lower margin primarily due
to public procurements in the car segment and performance pay calculated in the
last quarter to the employees for overall good annual results, it would be
prudent to follow up on the profit margin comparison in the next quarterly
report and see if the profit decline continues when compared to the same
quarter of last year.
The balance sheet is in a good condition, cash flow is positive and financial ratios are encouraging. The company should have no trouble in paying the dividend this year. Before taking a longer term position, it is recommended to see, if the fourth quarter YoY profit decline continues into the first quarter.
Conclusion
The current environment
with global indexes at all-time high and political uncertainty, suggest caution
is to be taken in smaller, less liquid markets. However the macro fundamentals
in Estonia seem to be supportive and the company fundamentals are encouraging,
therefore a short term trade has
high chances of success. It is recommended to buy the stock near or around the
current level - 8.7€ or lower if possible, during
the first days of February, with an exit one day before the ex-dividend in
April.
Later, at least one month
after the dividend payment, the environment should be re-evaluated and the
stock bought at a similar or somewhat lower price, depending on Estonian
macroeconomic and company specific developments. In case further caution is necessary,
the next quarterly report should be read, to confirm that the profit is not
declining further.
