Tallinna Kaubamaja short term trading strategy

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

Inflation growth shows similar modest rise from the low levels it was during the years 2014-2015. The central bank projects a rise of inflation in 2017, mainly due to the rise of excise tax. Rising inflation will have a positive effect on the retail sector companies.
 

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.