Automated Warehouses And Cost Savings Will Transform Earnings Power Over The Long Term

Catalysts

About Meko

Meko operates automotive aftermarket wholesale, logistics and related workshop concepts across the Nordics, Poland and the Baltics.

What are the underlying business or industry changes driving this perspective?

• The high tech, automated warehouse network across Sweden, Norway, Denmark and Finland is now largely in place. It can support higher order volumes with fewer full time employees and fewer sites, a setup that can lift operating efficiency and support EBIT margins as temporary double rent and transition costs roll off.
• Cost saving programs under the Building Strong Meko initiative, including more than 500 fewer full time employees and SEK 300 million EBIT improvements targeted from earlier measures and summer actions, are designed to reduce the fixed cost base and can support higher EBITDA and earnings if revenue stabilises or grows.
• Integration of Elit in Poland, including closure of 14 branches and warehouse consolidation around a large Warsaw facility, is intended to shift the business from a restructuring phase toward a more scalable platform. This can support improved country mix, gross margins and EBIT once the operational disruptions subside.
• Expansion of exclusive brands such as “Every Part Matters” into 7 new markets and broader private label offerings for price sensitive customers are aimed at capturing demand in a cautious consumer backdrop. This can support revenue growth and potentially higher gross margins through more control over product mix.
• Growth initiatives in e commerce, including rolling out the Mekster webshop across the Nordics, together with a push in commercial vehicles, are aligned with increasing online purchasing of car parts and sustained reliance on cars for everyday mobility. These initiatives can support long term revenue growth and a larger earnings base.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Meko compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Meko's revenue will grow by 3.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.2% today to 3.7% in 3 years time.
• The bullish analysts expect earnings to reach SEK 760.0 million (and earnings per share of SEK 14.32) by about July 2029, up from SEK 43.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.1x on those 2029 earnings, down from 100.5x today. This future PE is lower than the current PE for the GB Retail Distributors industry at 20.8x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained price competition across the Nordics and Poland, including more active e commerce players and export focused European peers all fighting for volume and supplier bonuses, could keep gross margins under pressure for longer. This would constrain EBIT margins and earnings.
• If cautious consumer behavior persists and car owners continue to delay non essential repairs and maintenance, organic growth could stay close to flat or weak. This would limit the benefit from cost savings and weigh on revenue and overall earnings.
• The heavier use of automation, new central warehouses and the ERP project across multiple countries introduces execution risk. Prolonged calibration issues, temporary staff costs and double rent could drag on operating efficiency and keep EBIT margins subdued.
• Higher leverage at 3.6x in a period of lower profitability and past heavy investment, together with ongoing interest and waiver related costs on the bond financing, could restrict financial flexibility and leave less room for setbacks. This would affect net profit and free cash flow.
• The integration of Elit in Poland, including 14 branch closures and a large warehouse move in Warsaw, is still a work in progress. If price pressure in Poland remains strong or the restructuring takes longer than planned, the weaker country mix and margin pressure could weigh on group EBIT and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Meko is SEK100.0, which represents up to two standard deviations above the consensus price target of SEK94.0. This valuation is based on what can be assumed as the expectations of Meko's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK100.0, and the most bearish reporting a price target of just SEK88.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK20.4 billion, earnings will come to SEK760.0 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of SEK77.7, the analyst price target of SEK100.0 is 22.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.