(The online newspaper) NorgesGruppen and Reitan Retail have presented billions in profits for 2022. The grocery players have often complained about low margins – the difference between sales revenue and operating expenses. But is the poor profitability correct? No, says investment director Robert Næss at Nordea, which also receives support from a researcher.
– I think it is wrong to focus on operating margins. It is a number that depends on how much capital the owners have to provide, as well as the risk in the business. The important thing for the owners is a return on capital over time, says Næss to Nettavisen.
In 2022, NorgesGruppen had a handsome 13.1 per cent return on the owners’ funds (equity) before tax, which is a full 10 percentage points above the best deposit rate you can get in the bank. That’s a lot, we’ll get back to that.
Extremely high
But Næss believes it is even more interesting to look at the return on the total capital. The debt on which NorgesGruppen pays interest is also included.
– This return last year was a pleasant 12.8 per cent, but was extremely high in 2021 and 2020 at around 19 per cent. And NorgesGruppen earned NOK 3.5 billion before tax last year. It’s not that bad, says Næss.
– It is also interesting that the operating profit from the retail trade in 2022 only accounted for a third of the overall operating profit. Overall earnings can be good even if margins fall on the retail trade, he continues.
Executive Vice President Communications and Public Relations Stein Rømmerud at NorgesGruppen agrees that return on total capital is an important profitability measure. He states it at 7 percent last year.
Different types of business
NorgesGruppen consists of both store chains such as Meny, Kiwi, Spar and Joker, wholesaler Asko and other types of service operations. In the second half of 2022, the retail stores had an operating profit of NOK 788 million, which was better than in the first half of the year.
NorgesGruppen, on the other hand, had “shockingly poor earnings” on its own brands (EMV), according to Næss. There they lost 103 million on operations in the second half of the year.
– When it comes to the result for the EMV area, it is true that 2022 was a demanding year. Raw material increases, imports, transport, a new computer system and a number of other extraordinary costs hit this business area. Here we expect a normalization in the years ahead, says Rømmerud.
By far Norway’s largest grocery player, in recent years it has had the greatest growth within catering businesses and businesses abroad.
Headache
– This area was a headache for them a few years ago, but in recent years, including 2022, these businesses have produced solid growth, says Næss.
The investment director says NorgesGruppen is a well-run company that he would have liked to see on Oslo Børs. In contrast to several countries, there is not a single listed Norwegian grocery company. We only have supplier companies such as Orkla.
– Although NorgesGruppen has international operations, they focus on Norwegian consumers. There are not too many of those companies on the Oslo Stock Exchange. NorgesGruppen has delivered solid earnings year after year, and the underlying growth has been good, concludes Næss.
Despite cost growth, profitability improved through 2022. In the second half of last year, NorgesGruppen earned NOK 1,933 million before tax.
Best ever
– It was the best six months ever apart from the pandemic, says Næss,
– Now I don’t know how the price competition in 2023 will turn out. This could mean that the 2023 result will be lower than in 2022, says Næss.
And then there was the requirement for a return for the owners. Shares must have a higher return requirement than the more risk-free interest rate market. 5 percentage points above what you get on the highest deposit rates is a normal requirement. In today’s interest rate market, this corresponds to approx. 8-8.5 percent return for shares.
But businesses that fluctuate little with the economic cycle do not pose as much risk. In the US, Walmart is listed on the stock exchange, and the Walmart share clearly fluctuates less than the overall market. Næss believes that the return requirement for NorgesGruppen can be set lower.
Worth 60 billion
In any case, NorgesGruppen is worth many tens of billions of kroner, much more than what appears in the accounts.
– As long as NorgesGruppen maintains its market position, I believe that they can be valued at up to 20 times this year’s earnings, says Næss.
What does that mean? NorgesGruppen earned NOK 2.6 billion after tax last year. But if the second half of the year is representative, they are likely to earn three billion. If NorgesGruppen is valued at 20 times this annual earnings, we get a value of 60 billion.
The book value of the owners’ funds – equity – was NOK 27.7 billion at the end of last year. In the accounts, there may be many large values that do not appear. A doubling of the real values is not unusual.
– When I arrive at a value of NOK 60 billion, it corresponds to 2.2 times the book equity (2.2 x 27.7 billion, editor’s note). The companies on the Oslo Stock Exchange are valued on average at 1.6 times their book values.
– This indicates that NorgesGruppen is clearly more profitable than the sum of the companies on Oslo Børs, says Næss.
