Ahold’s 2012 results illustrate that trading conditions remain tough in the food retail sector as consumers continue to be focused on prices. In the US identical store sales growth excluding fuel slowed down from 2.9% in 2011 to 0.5% in 2012. In the Netherlands the momentum decelerated from 2.8% to 1.0%. Price inflation was significantly lower compared to 2011. The group’s underlying operating margin contracted by 20bps to 4.3% but this was partly due to the inclusion of online retailer bol.com. The cost savings target for 2012-2014 was upped last November from € 350m to € 600m. Last year, the group realized € 190m in savings which were reinvested in prices and promotions. Ithas also managed to gain market share in all major markets and free cash flow reached a record level of € 1.2bn. (10,97 EUR, 0,05%) is clearly delivering on its strategy while balancing sales growth and margins.
At the end of 2012, was sitting on a cash pile of € 1.9bn and interest income reached merely € 10m in 2012 or 0.5% of the average cash balance. Taking into account the announced DPS of € 0.44 (+10%), the € 500m share buyback program and the disposal proceeds and dividend from ICA, the cash pile is set to rise to € 3.4bn (about 25% of the group’s market cap). Fundamental choices will need to be taken. The cash provides the group with the opportunity to make a sizeable acquisition (e.g. Harris Teeter) but this could be perceived as risky. A sizeable capital repayment is another plausible alternative.
Management has abstained from providing sales and operating guidance for 2013. In the Netherlands, this year’s underlying operating profits will be dampened by a change in pension accounting. (39,44 EUR, 0,70%) cash contributions for the ongoing plans will not increase however in 2013. Our fully-diluted EPS forecasts for continuing operations in 2013 and 2014 are lowered by respectively 7% and 4%. As ICA will be included under discontinued operations in 2013, its contribution to Ahold’s net profits is no longer included in our EPS from continuing operations.
The sum-of-the-parts method which includes the announced disposal price for ICA generates a value of € 11.9 per share. We stick to our Accumulate rating but raise the target price from € 11.5 to € 11.9.