A Brief Kesko Stock Analysis
About Kesko Corporation: What I'm going to discuss here is what they do, their finances, and see if we can identify any strengths, weaknesses, and what to look out for in the future. Kesko is based in Finland and can be traded on the Nasdaq Helsinki. They are a dividend company with a P/E ratio that typically ranges between 12 and 16.
What Does Kesko Corporate Do?
In my analysis of Kesko, I can see that they primarily operate within three main segments: grocery trade, building and technical trade, and car trade. It appears that these different segments help Kesko diversify into various market situations.
Grocery Trade:
Store Chains: Kesko operates several different grocery chains such as K-Citymarket, K-Supermarket, and K-Market, covering a wide range from budget to premium.
Foodservice: Through Kespro, they offer food and catering solutions to business customers, including restaurants, hotels, and public institutions.
E-commerce: Kesko has seen significant growth in online grocery sales, especially following the pandemic.
Building and Technical Trade:
B2B and B2C: This segment caters to both regular and professional users through stores such as K-Rauta, Byggmakker (which we are familiar with in Norway), and Onninen.
Products and Services: Their assortment includes everything from construction materials, electrical components, and plumbing equipment to other technical services.
Geographical Reach: The segment has a strong presence in Finland, Sweden, Norway as well as in several Eastern European countries. Recent acquisitions, such as Davidsen in Denmark and Elektroskandia in Norway, have enhanced their presence in the Nordic countries.
Car Trade:
Sales and Services: Kesko deals in new and used cars, in addition to offering financing, maintenance, and repair services.
Brands: They represent well-known car brands such as Volkswagen, Audi, SEAT, Porsche, and Bentley. However, the availability of these brands might vary by country. They primarily operate in Finland and the Baltic countries.
Kesko's Strategy
Currently, the corporation is focusing on becoming more digital, cost efficiency, sustainable growth, and strategic acquisitions.
Digital Transformation and Online Growth:
Investment in Technology: Significant investments in e-commerce and digital platforms to improve customer experience and efficiency.
E-commerce: Substantial growth in online sales, especially in the grocery sector, which has become an important channel for customer satisfaction and loyalty.
Cost Efficiency and Operational Excellence:
Efficient Operations: Focus on optimizing logistics, reducing costs, and improving operational processes.
Economies of Scale: Larger scale allows Kesko significant cost savings.
Sustainable Growth and Investments:
Environmental Focus: Commitment to sustainable solutions, including green energy, eco-friendly products, and reduction of carbon footprint.
Acquisitions and Expansion:
Strategic Acquisitions: Acquiring companies like Davidsen and Elektroskandia to strengthen their presence in new markets and expand their product portfolio.
Geographical Expansion: Focusing on strengthening the position in existing markets and expanding into new geographical areas.
Long-term Investments: Investing in future growth through acquisitions and expansion of the store networks.
I am looking forward to seeing what the future of acquisitions and expansion looks like and how the long-term investments will pan out.
Analysis of Kesko's Finances
Going into my Kesko stock analysis, I have to ask myself, is this a good result? Generally, I found Q1 2024 to be very disappointing. Inflation and a dampening in sales led to an 8-10% worse performance compared to the previous year, showing that Kesko has some work to do regarding sales going forward.
Of course, with exposure to the construction industry and car sales, Kesko is not just a defensive stock; here, the cyclical drivers are hurting. Looking ahead, there's no guarantee that new car sales will perform well (interest rates need to drop) so there might be several tough quarters ahead.
Overall, Kesko's economy is characterized by low top-line growth, low margin, significant increase in interest-bearing debt/leasing over the last decade that continues into Q1 2024. They have spent significant amounts on investment activities.
However, they do provide good dividends, which are of strong interest to a dividend investor.
Statement
Despite poor growth in top-line revenue, Kesko has demonstrated that this isn't the only metric that matters. Starting with very poor margins, they have managed to improve them significantly (by a factor of 5) and really clean up the bottom line.
I hope to see more positive changes in the top line in the future, and while it's difficult to be certain how much more they can improve margins, this is something they are continuously working on and have shown they can enhance.
Overall, I would rate the results as "OK," but the lack of top-line growth and poor margins make it challenging.
Net income | Operation profit | Results | EBIT margin | Margins | |
2014 | 9070.6 | 151.4 | 108.5 | 1.67% | 1.20% |
2015 | 8678.9 | 194.6 | 117.4 | 2.24% | 1.35% |
2016 | 10180.4 | 146.8 | 113.8 | 1.44% | 1.12% |
2017 | 10675.9 | 324.6 | 268.8 | 3.04% | 2.52% |
2018 | 10382.8 | 404.3 | 232.4 | 3.89% | 2.24% |
2019 | 10720.3 | 447.8 | 333.6 | 4.18% | 3.11% |
2020 | 10669.2 | 600.2 | 435.3 | 5.63% | 4.08% |
2021 | 11300.2 | 775.2 | 571.8 | 6.86% | 5.06% |
2022 | 11809 | 816.5 | 609.9 | 6.91% | 5.16% |
2023 | 11783.8 | 695.4 | 495.6 | 5.90% | 4.21% |
Balance
In my analysis of the company's balance sheet, I can report that a doubling of assets and more than a doubling of debt indicates that they have spent a lot on achieving growth. This is growth that doesn't show well on the results, but let's delve a bit further into the cash flow.
Generally, I think they are starting to accrue a bit too much interest-bearing debt now, and I hope they will spend more effort in the future to control these costs.
Liquidity itself looks strong and indicates that the balance sheet still has good health, but personally, I prefer a lower debt growth for a company that has not been able to achieve top-line growth.
Debt | Total Assets | Interestbearing debt | Cash | |
2014 | 1932.2 | 4197.7 | 498.9 | 107 |
2015 | 1897.4 | 4139.3 | 439.1 | 141.2 |
2016 | 2280.5 | 4407.7 | 514.7 | 141.3 |
2017 | 2239.3 | 4471.6 | 533.9 | 132.7 |
2018 | 4330.4 | 6366.8 | 2747.6 | 139.2 |
2019 | 4747.7 | 6899.3 | 2678.4 | 124.4 |
2020 | 4450.3 | 6641.9 | 2616.3 | 254.3 |
2021 | 4436.5 | 6966 | 2295.1 | 279.8 |
2022 | 4731.8 | 7473.6 | 2418.2 | 245.5 |
2023 | 4995.9 | 7754.3 | 2787 | 211.9 |
Cash flow
With a threefold increase in operations, they have had good opportunities to pay dividends and invest heavily. This is something they plan to continue with.
I think the operations look strong, but they show some weaknesses.
In 2023, financing costs of 354 million were due to leasing, and in Q1, nearly 100% of the remaining operations go towards dividends (excluding investment activities). So, they need to be mindful of their cost levels, especially if there's stronger competition in their areas.
Cash Flow | Investment | Finance flow | Dividend | |
2014 | 304.4 | -182.1 | -253.6 | -143.4 |
2015 | 276.4 | 217.1 | -465.7 | -156.1 |
2016 | 170.2 | -501.1 | 195.6 | -249.5 |
2017 | 301.7 | -88.3 | -242.9 | -203.8 |
2018 | 725.2 | -209 | -545.7 | -225.4 |
2019 | 896.6 | -616.8 | -295.4 | -238.2 |
2020 | 1152.4 | -421.3 | -600 | -249.9 |
2021 | 1152 | -292.3 | -834.4 | -297.8 |
2022 | 915.2 | -344.3 | -604.7 | -406.7 |
2023 | 1049.5 | -590.2 | -492.2 | -430.3 |
Key Ratios
With increased borrowing, the Debt-to-Equity (D/E) ratio, Debt-to-EBITDA, and Return on Equity (ROE) have all increased significantly. This has raised the risk profile of the stock and is not a good sign, in my view.
D/E | Debt-to-EBITDA Ratio | ROE | ROA | |
2014 | 0.85 | 1.44 | 4.79% | 2.58% |
2015 | 0.85 | 1.32 | 5.24% | 2.84% |
2016 | 1.07 | 1.67 | 5.35% | 2.58% |
2017 | 1.00 | 1.12 | 12.04% | 6.01% |
2018 | 2.13 | 3.82 | 11.41% | 3.65% |
2019 | 2.21 | 3.47 | 15.50% | 4.84% |
2020 | 2.03 | 2.83 | 19.86% | 6.55% |
2021 | 1.75 | 2.11 | 22.61% | 8.21% |
2022 | 1.73 | 1.85 | 22.24% | 8.16% |
2023 | 1.81 | 2.26 | 17.97% | 6.39% |
Analysis of the Stock Position
Strengths of the Stock
Strong Market Position: Kesko holds a leading position in several markets, providing a solid foundation for growth and stability.
Diversified Portfolio: Involvement in multiple segments and geographic markets reduces risk and offers cross-selling opportunities.
Innovation and Digitalization: The growth experienced, especially in e-commerce, gives them a competitive advantage in an increasingly digital market.
Sustainable Focus: A strong emphasis on environmental friendliness and sustainability appeals to a growing consciousness among customers and investors.
Strong Operating Income: Strong cash flow indicates quick revenue collection, and the reason for debt uptake has been for growth.
Bottom Level in Portfolio: It's possible that the construction sector has hit bottom and that this segment will improve during 2024.
Weaknesses of the Stock
Dependence on Nordic Markets: High exposure to economic fluctuations in the Nordic countries can be a risk, particularly since Kesko reports in EURO.
Cost Structure: High fixed costs may limit flexibility and negatively impact profitability during periods of lower revenue.
Competition Pressure: Increasing competition from both traditional players and new digital platforms can pressure margins.
High Debt Pressure: With low margins and increased debt costs, a larger portion of operations will be consumed by repaying interest/leasing costs.
New Car Sales: May continue to be difficult in the near future.
What to Monitor
If investment activity continues and leasing costs increase, it will raise the risk in the stock. This should be monitored.
Can they improve top-line growth? This is something they need to continue working on, and if they fail, the question arises whether the stock is worth holding at all (there's only so much you can squeeze out of a total sum).
Quick Summary
As a quick review of my stock analysis of Kesko reveals, Kesko stands as a robust player in the Nordic and Baltic retail market, with a diversified business model and strong market position.
Their strategy focuses on digitalization, cost efficiency, and strategic acquisitions.
Despite challenges such as high fixed costs, a lack of growth, and dependence on Nordic markets, their financial results show an ability to adapt and maintain profitability and good operations.
They mainly provide good quarterly dividends, which could significantly improve if the cyclical markets such as car and construction sales improve. Both are expected to see an improvement if interest rates decrease.
Despite my negative wording around Kesko's economy, they have navigated through a difficult period positively on the bottom line, showing that they can be a good investment during times when the market is sour.
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