EUR 445.66 For Business Accounts Only

Axfood (Hold, TP: SEK200.00) - Steady sailing in stormy waters

We initiate coverage with a HOLD and SEK200 target price. We consider Axfood the Swedish grocer best-positioned to benefit from changing market dynamics and to be a relative outperformer in a scenario of increased near-term economic uncertainty. However, this looks to be priced in, and we see limited scope for higher multiples given the current outlook. Relative outperformer thanks to its position in key high-growth categories. Axfood is a market leader in the retail discount segment through Willys, and has developed its online presence more effectively than traditional grocery peers. The sector has seen tailwinds from the effects of the pandemic, due to more people eating at home, while Axfood’s exposure to Norwegian border trade and the restaurant sector should see it continue to outperform peers if the economy normalises and Covid-19 restrictions are eased or ended. Cash flow under pressure from increased capex. As Axfood transitions further into online across its grocery segments, we see a risk of execution and integration issues, as well as further investments. Our forecasts include a cash flow reduction on higher capex due to increased IT investments (mainly in the online business). We expect dividend and FCF yield to come under pressure from a material step-up in investments. We forecast the FCF yield will fall from 6.2% in 2020 to 3.3% in 2022 (160bp below its 5-year average of 4.9%), while dividend yield is set to average 3.8% in 2020–2022e (80bp below its 5-year historical average of 4.6%). We are broadly in line with consensus. We do not differ materially from 2020 Infront Data consensus, besides being 1% above on sales. However, longer-term we are slightly more positive on sales and earnings: for 2021e we are 1% above on sales and on EBIT, and for 2022e we are 1% above on sales and 2% above on EBIT. We initiate coverage with a HOLD and SEK200 target price. This corresponds to a 2021e P/E of 22.6x (35% premium to global food retail peers, 18% premium to its 10-year historical average), with a 2021e dividend yield of 3.8% (80bp below its 5-year historical average), based on our DCF and peer group multiples. We see limited scope for higher multiples given the current outlook.