(The newspaper online) NorgesGruppen and Reitan Retail reported billions of dollars in profits for 2022. Grocery players have often complained about low profit margins – the difference between sales revenue and operating expenses. But is double profitability true? No, says investment manager Robert Ness at Nordea, who also receives support from the researcher.
– I think it’s wrong to focus on operating margins. It’s a number that depends on how much capital the owners have to provide, as well as the risks in the business. The important thing for owners, Ness tells Netavisen, is return on capital over time.
In 2022, the NorgesGruppen had a healthy 13.1 percent return on owners’ money (equity) before tax, which is a full 10 percentage points more than the best deposit rate you can get in a bank. That’s a lot, we’ll come back to that.
But Ness thinks it’s interesting to look at the return on total capital. Debt on which NorgesGruppen pays interest is also included.
– This return last year was a nice 12.8 percent, but it was very high in 2021 and 2020 at about 19 percent. NorgesGruppen received NOK 3.5 billion before tax last year. It’s not that bad, says Ness.
– It is also interesting that the operating profit from retail in 2022 accounted for only a third of the total operating profit. Gross profits can be good even if margins are down in the retail business, he continues.
Stein Roemer, executive vice president of communications and public relations at NorgesGruppen, agrees that return on total capital is an important profitability measure. He mentions it by 7 percent last year.
different types of business
NorgesGruppen consists of both department store chains such as Meny, Kiwi, Spar, Joker, wholesaler Asko, and other types of service operations. In the second half of 2022, the retail stores generated an operating profit of NOK 788 million, which is better than the first half of the year.
NorgesGruppen, on the other hand, had “shockingly weak earnings” on its EMV brands, according to Nice. There they lost 103 million in the second half of the year.
– When it comes to the result of the EMV region, it is true that 2022 was a difficult year. Increased raw materials, imports, transportation, a new computer system, and a number of other unusual costs affected this line of business. Romerod says: We expect normalization here in the coming years.
By far Norway’s largest grocery operator, and in recent years it has achieved the greatest growth in the catering business abroad.
– This area was a headache for them a few years ago, but in recent years, including 2022, these companies have experienced strong growth, says Ness.
The investment manager says NorgesGruppen is a well-run company and he would have liked to see it in Oslo Bors. Unlike many countries, there is not a single norwegian grocery company listed. We only have supply companies like Orkla.
– Although NorgesGruppen has international operations, it is focused on Norwegian consumers. There are not many such companies on the Oslo Stock Exchange. NorgesGruppen has had solid earnings year after year, and underlying growth has been good, Næss concludes.
Despite cost growth, profitability has improved through 2022. In the second half of last year, NorgesGruppen earned NOK 1.933 million before tax.
The best ever
It was the best six months ever away from the pandemic, says Ness.
– Now I don’t know how the price competition will end in 2023. This may mean that the result in 2023 will be lower than in 2022, says Ness.
And then there was the return clause to the owners. Equities must have a higher return requirement than the risk-free interest rate market. 5 percentage points above what you get at the highest deposit rates is a normal requirement. In today’s interest rate market, this corresponds to approx. 8-8.5% return on equity.
But companies that fluctuate slightly with the economic cycle don’t pose as much risk. In the US, Walmart is listed on the stock exchange, and Walmart’s share obviously fluctuates less than the overall market. Næss believes NorgesGruppen’s return requirements could be set lower.
worth 60 billion
In any case, NorgesGruppen is worth tens of billions of kronor, much more than it shows in the calculations.
– As long as NorgesGruppen maintains its position in the market, I think it can be valued at up to 20 times this year’s earnings, says Ness.
What does it mean? NorgesGruppen earned NOK 2.6 billion after tax last year. But if the second half of the year is typical, they could potentially earn three billion. If NorgesGruppen is valued at 20 times that annual profit, we get 60 billion.
The book value of the owners’ funds – equity – was NOK 27.7 billion at the end of last year. In the calculations, there may be several large values that do not appear. Doubling real values is not unusual.
– When it came to a value of NOK 60 billion, it corresponded to 2.2 times the book’s equity (2.2 x 27.7 billion, editor’s note). Companies on the Oslo Stock Exchange are valued on average at 1.6 times their book value.
– This indicates that NorgesGruppen is clearly more profitable than the Oslo Bors group of companies, says Ness.
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