Description

Note: This copany reports in Danish Krona. The financial information below is in DKK. The current exchange rate is DKK6.31 per USD. The financial information on the top was converted to USD using the latest FX rate. The historical information below is in DKK. 

Thesis

At the current price of DKK 155/share, the stock of TCM Group, listed in Denmark, (TCM DC) represents an attractive opportunity to invest in a well capitalized, profitable, well managed, growing business at an attractive valuation. The company has a net cash position. It generates a 20% ROE.. It has grown sales and operating income at a 13% and 15% cagr over the last five years. And, it trades at 12x 2021 expected earnings.  It is well positioned to grow by gaining share in a highly fragmented industry that is increasingly dominated by technologically advanced providers that can provide quality, customized solutions. 

The opportunity to invest in such a high quality business at such an attractive valuation exists, in my opinion, because the stock is illiquid ($400k adtv) and is not well known outside of Scandinavia.

Market Capitalization

TCM Group has 10 million shares outstanding, of which 5% are held in treasury. It has a market capitalization of DKK 1,550 million (USD 246 million) and net cash of DKK 14 million (USD 2 million). 

Historical Financials

Company Description

TCM Group is one of Denmark’s leading  manufacturers of innovative, customized, high quality kitchen, bath, and wardrobe solutions. The company was started by Paul Frandsen, a master carpenter and joiner who, in 1952, developed the Tvis brand. In 2005, TCM Group acquired  Svane, a high end custom kitchen brand. In 2006, TCM Group was acquired by Scandinavian private equity group, Axcel. In 2017, TCM Group acquired Nettoline, a kitchen manufacturer focused on the DIY segment. In November 2017, TCM Group listed on the Copenhagen stock exchange. 

TCM Group generates 90% of its revenues in Denmark, with the balance coming from Norway. It operates four brands and a private label B2B offering. Svane is the high end brand, and it is sold  through branded franchise stores.  Tvis is the middle market brand, and it is sold through dealers. Nettoline is a do it yourself (DIY) brand sold online and through dealers. Kitchn.dk is a newer concept online brand offering self-assembly solutions to the DIY segment. Additionally, TCM Group manufactures private label solutions which retailers sell under their own brands. 

The company operates three state of the art manufacturing facilities in Denmark. All sales are against orders. There is a high level of customization. The company has a negative working capital position.

The key competitive advantage of the company is its  ability to deliver high quality, customized solutions at scale in a highly fragmented market that is still dominated by mom and pop operators. 

Current management has proven historically to be adept at executing and successfully integrating tuck in acquisitions. 

Industry Trends

Kitchen cabinetry in Scandinavia is a growing market There are several drivers supporting this trend. The older, wealthier cohort of the population is growing at 3% per annum, and this demographic has a high propensity to spend money on renovating their kitchens. Increasing urbanization and smaller household size increase the demand for kitchens. The number of housing transactions and property prices continues to be supportive of renovations. The share of household disposable income devoted to home renovation continues to grow. There is a growing trend towards open kitchens versus a separate dining/living area, and aesthetics and design play a bigger role. There is also a growing trend towards customized solutions. According to surveys, customers are willing to pay a 20% premium for customized solutions. These trends are supportive of growth in both volume and value and point to a continuation of a GDP plus 1-3% growth in the market.

The industry is highly fragmented.  The overall market continues to be dominated by mom and pop operations which presents a long term consolidation opportunity for operators like TCM Group who are leveraging technology and to deliver visualization and customization tools combined with advanced, high quality manufacturing facilities and efficient distribution. 

According to Nobia AB (NOBI SS), the leading manufacturer of kitchens in Scandinavia, the annual market for kitchen cabinetry is roughly 700,000 units a year. Nobia claims to have roughly 25% of the market, split into 70% B2C and 30% B2B. If Nobia, with $1.3 billion revenues in 2020, accounts for roughly 25%, the overall Scandinavian market is roughly a  $5.2 billion revenue market. TCM Group, which has been growing at 13% a year, represents only  roughly 3% of the overall market ($157 million revenues in 2020); yet, it is one of the largest and best capitalized players in the industry. 

Valuation and Upside 

TCM Group trades at 12x 2021E earnings and 10x 2021E  earnings. Howden Joinery Group PLC (HWDN LN), the leader in the UK kitchen market, trades at 25x 2021E earnings and 23x 2022E earnings. Nobia AB (NOBI SS), the leader in Scandinavia, trades at 15x 2021E earnings and 13x 2023E. 

Conclusion

TCM Group is a profitable, well managed, well capitalized company that is very well positioned to grow in the healthy and fragmented Scandinavian custom kitchen cabinetry market. The stock currently trades at a 20% discount to Nobia AB and a 50% discount to Howden Joinery Group. As the company grows and delivers, this discount is likely to narow.

The company has a 3% market share. Yet, it is one of the best positioned, best managed players in a highly fragmented market that is growing 1-3% above GDP. If the company continues to execute and gain share, as it has in the past, it should compound revenues and earnings at a high single digit/low teens rate while paying a 3.5% dividend. Multiple expansion would further enhance returns. 

The company has repurchased 5% of the shares since going public in 2017. In 2020, the dividend was suspended preemptively, but in 2021, the company is paying a regular dividend as well as an extraordinary dividend and has initiated a buyback program for 10% of the shares. In total, this implies an 18% return of capital in 2021. 

Risks

The biggest near term risk is a cyclical downturn in the housing markets in Scandinavia. Longer term, a downturn would favor TCM Group because it would enable it to gain share. Near term, it would hurt earnings. Last year, despite the closures caused by Covid, revenue was flat. 

Execution is always a risk. Management has to continue to execute as it has in the past. It is important as an investor to monitor the success of the expansion into the Norwegian market.

Catalyst

I believe that if the company continues to execute on its plan and grow, over time the discount to peers will narrow. The company is cash generative and will continue to buy back shares and grow its dividend.