TKM Grupp AS (TKM1T.TL) Investment Analysis:

1. Executive Summary

TKM Grupp AS (TKM Grupp) is one of Estonia's largest and most established retail and wholesale trade conglomerates, with a history dating back to 1960 and a primary listing on the Nasdaq Tallinn Baltic Main List. The Group's diversified business model is structured across five core operating segments: Supermarkets, Department Stores, Car Trade, Security, and Real Estate. The Supermarkets segment, operating primarily under the well-known Selver brand, serves as the foundational revenue driver, while the cyclical Car Trade segment has historically been a significant, albeit volatile, contributor to profitability.

The company is currently navigating a challenging operating environment, particularly within its core Estonian market. The Baltic region, and Estonia specifically, is contending with a difficult macroeconomic backdrop characterized by some of the highest inflation rates in the Euro area, sluggish economic growth following two years of contraction, and persistently low consumer confidence. These factors, compounded by domestic tax increases, have directly impacted consumer disposable income and discretionary spending, leading to margin compression and a slowdown in sales across several of the Group's key segments.

This report posits that TKM Grupp represents a case of a market-leading, resilient business whose intrinsic value is currently obscured by cyclical headwinds. While near-term financial performance reflects the prevailing economic pessimism, the company's strategic investments in critical areas such as logistics infrastructure and digital e-commerce platforms are laying the groundwork for enhanced efficiency and long-term value creation. The current valuation appears to have priced in a significant degree of near-term uncertainty, potentially offering an attractive entry point for investors with a long-term horizon. Based on a detailed fundamental analysis, this report derives a probability-weighted 5-year price target of €12.56, suggesting a material disconnect between the current market price and the company's long-term earnings power potential.

2. Business Drivers & Strategic Overview

TKM Grupp's operations are diversified across five distinct business segments, each with its own set of drivers, challenges, and strategic imperatives. This diversification provides a degree of resilience, though the Group's overall performance remains closely tied to the health of the Baltic consumer.

Segmental Analysis

Supermarkets (Selver, Delice, Kulinaaria) This segment is the cornerstone of TKM Grupp, accounting for approximately 65% of total Group revenue in 2024. The network includes 72 Selver stores, two premium Delice stores, the comprehensive e-Selver online grocery platform, and the Kulinaaria central kitchen, which supplies a wide range of ready-to-eat meals. The segment's performance is a direct reflection of consumer staples spending. In the current high-inflation environment, revenue growth has been modest, increasing just 0.9% year-over-year in Q3 2025, while profitability has been under pressure, with segment EBITDA declining 10% in the same period. This margin compression is a result of a deliberate strategy to maintain competitive pricing and protect sales volumes, which has led to a higher mix of lower-margin promotional items in customer baskets as consumers seek value. The strategic focus for the supermarket business is on improving its price image to better compete with discounters, enhancing its premium product selection to capture less price-sensitive consumers, and driving operational efficiency through store renovations and an expanded e-commerce footprint on third-party platforms like Bolt and Wolt.

Car Trade (KIA, Opel, Peugeot, etc.) The Car Trade segment is the Group's second-largest by revenue, contributing 21% of sales in 2024, but its importance is magnified by its high profitability, accounting for a disproportionate 35% of the Group's net profit in that year. This highlights both its potential as a profit engine and its inherent cyclicality and volatility. The segment's performance has been erratic, with sales declining 9.6% in the first nine months of 2025 before showing signs of recovery with 4.1% growth in the third quarter. Despite the revenue stabilization, significant margin pressure persists, with Q3 2025 EBITDA remaining 19% below the prior-year level. The strategy here is focused on expansion and capitalizing on market trends. The Group has opened a new Viking Motors dealership near Tallinn and is constructing a new multi-brand auto center in Lithuania. Future performance will be heavily influenced by the successful launch of new models, such as the updated KIA Sportage and the upcoming KIA EV4 electric vehicle, which are expected to support a recovery in sales volumes and profitability.

Department Stores (Kaubamaja, I.L.U.) The Department Stores segment, centered around the iconic Kaubamaja brand, is a leader in fashion, beauty, and home goods in Estonia. It represents approximately 11% of Group revenue but has recently struggled with profitability, posting a net loss in 2024. Its performance has been hampered by the broad economic slowdown, which has curtailed discretionary spending, and by localized disruptions in Tallinn that have reduced foot traffic. The I.L.U. cosmetics chain has also faced challenges, with sales declining 4.6% in Q3 2025. The strategic response is centered on revitalizing the customer experience through significant renovations, such as the successful transformation of the Tartu Food Department and the planned redesign of the Tallinn Children's Department, alongside a major push to integrate its physical and digital channels via a new e-store platform.

Real Estate & Security Though smaller in revenue contribution, these segments play important roles. The Real Estate segment is a stable and highly profitable anchor for the Group, managing its extensive property portfolio and generating consistent rental income. In 2024, it contributed 19% of the Group's net profit from just 1% of its revenue, underscoring its high margins and strategic value. This segment has been a standout performer, with external sales revenue growing 12.1% and pre-tax profit surging 45.4% in Q3 2025, demonstrating remarkable resilience in a weak economy. The Security segment provides services both internally and to external clients but has recently faced declining revenues.

Overarching Strategic Initiatives and Competitive Advantages

Beyond segment-specific strategies, TKM Grupp is pursuing several group-wide initiatives designed to strengthen its long-term competitive position. The most significant of these is the recent completion of a new central logistics center in Maardu. This is not merely a capital expenditure; it is a fundamental strategic investment aimed at defending and improving margins in the core supermarket business. With the supermarket segment operating on thin margins that are under severe pressure from inflation and price competition, this state-of-the-art facility directly addresses the cost structure by enabling more efficient inventory management, reducing waste, and optimizing the entire supply chain. Its successful implementation is critical for protecting profitability and is a key enabler for the profitable expansion of the e-Selver online business.

This is complemented by a group-wide focus on digital transformation, including new e-commerce platforms and the use of AI-powered recommendations, reflecting a clear commitment to an omnichannel retail model, which is a dominant trend in the Baltic market.

These strategic moves build upon TKM Grupp's existing competitive advantages, or "moat":

• Brand Equity: The Kaubamaja and Selver brands are deeply embedded in the Estonian consumer consciousness, representing quality and reliability that create a barrier to new entrants.

• Scale and Diversification: As one of Estonia's largest retail groups, TKM benefits from significant purchasing power and a diversified model where stable segments like Real Estate can offset volatility in others like Car Trade.

• Loyalty Program: The Partner Card is the largest loyalty program in Estonia, with over 750,000 active customers. This program fosters high customer retention and provides an invaluable repository of data for targeted marketing and personalized offers, a significant and sustainable competitive advantage.

The significant volatility in the Car Trade segment can often obscure the underlying stability of the Group's core retail and real estate operations. While swings in auto sales can cause headline earnings to appear erratic, the Supermarket segment provides a consistent revenue base and the Real Estate segment delivers a steady, high-margin profit stream. A nuanced analysis requires mentally separating the highly cyclical automotive business from the more durable consumer staples and property assets to accurately assess the Group's foundational earnings power and risk profile.

3. Financial Performance & Valuation

A review of TKM Grupp's financial history reveals a resilient business that has been significantly impacted by recent macroeconomic pressures. While top-line growth has been driven by inflation, underlying profitability has deteriorated, leading to a valuation that presents both opportunity and risk.

Historical and Recent Performance

From 2020 to 2023, TKM Grupp demonstrated solid performance. Revenue grew from €741.9 million in 2020 to a peak of €947.3 million in 2023, aided by a post-pandemic recovery and, more recently, high inflation. Net income followed a similar trajectory, peaking at €37.4 million in 2023. However, 2024 marked an inflection point. While revenue remained relatively flat at €944.6 million, net income fell sharply by 26.6% to €27.5 million. This decline reflects significant margin compression, with the operating margin contracting from 5.4% in 2023 to 4.6% in 2024.

This negative trend has accelerated into 2025. For the first half of the year, consolidated sales revenue decreased by 2.4% year-over-year, while pre-tax profit fell by a substantial 42%. The third quarter showed some signs of stabilization, particularly in the car segment, but overall profitability for the first nine months of 2025 remained 28.1% below the prior year. A primary driver of this margin erosion has been a persistent rise in operating expenses, particularly staff costs, which increased by 5.2% in H1 2025 despite a flat employee count, reflecting the tight labor market and wage pressures in Estonia.

Despite the pressure on net income, the company's ability to generate cash remains robust. Trailing-twelve-month (TTM) operating cash flow stood at a healthy €77.2 million, translating to a free cash flow of €54.5 million after capital expenditures. This strong cash generation is a critical attribute, as it provides a more accurate picture of the company's financial health than the currently depressed net income figure. While the dividend payout ratio based on earnings is unsustainably high at over 100%, the payout ratio based on free cash flow is a much more manageable 50%. This indicates that significant non-cash charges, such as depreciation, mean the company's capacity to fund its dividend and investments is stronger than net income alone suggests.

Valuation Analysis

As of mid-October 2025, TKM Grupp's shares trade around €9.21, giving it a market capitalization of approximately €375 million. The TTM price-to-earnings (P/E) ratio stands at an elevated ~19.5x, a figure that is distorted by the recent sharp decline in earnings. More stable valuation metrics present a different picture: the price-to-sales (P/S) ratio is low at 0.4x, and the enterprise value-to-EBITDA (EV/EBITDA) multiple is a reasonable 8.0x-8.5x.

The stock's most prominent feature is its high dividend yield of approximately 7.0%. However, this comes with a significant caveat. The dividend for fiscal year 2024 (paid in April 2025) was cut to €0.65 per share from €0.72 the prior year, a direct response to falling profitability. The current dividend level is not well covered by TTM earnings, signaling a risk of further cuts if profitability does not recover in the near term. Analyst coverage is limited, but the consensus price target is €11.00, implying potential upside of around 19% from the current price.

This collection of metrics creates a classic "value versus value trap" dilemma. On one hand, the high dividend yield, low P/S ratio, and reasonable EV/EBITDA multiple suggest an undervalued asset. On the other hand, declining earnings, negative revenue growth, and a high P/E ratio are characteristic of a value trap. The resolution of this dilemma hinges on whether the current earnings compression is a temporary, cyclical phenomenon driven by the macroeconomic environment, or a permanent, structural shift due to a loss of market share or pricing power.

4. Risk Assessment & Macroeconomic Considerations

TKM Grupp's performance is inextricably linked to the economic health of its primary markets, particularly Estonia. The current macroeconomic environment presents significant headwinds, while company-specific operational challenges add further layers of risk.

The Estonian Consumer Squeeze

The primary external risk facing TKM Grupp is the severe and prolonged pressure on the Estonian consumer. This pressure stems from a confluence of negative factors:

• Persistent Inflation: Estonia has consistently recorded one of the highest inflation rates in the Euro area, standing at 5.2% year-over-year as of June 2025. Forecasts for the full year 2025 remain elevated, in the range of 3.8% to 5.5%, which continues to erode the real purchasing power of households.

• Stagnant Economic Growth: Following two consecutive years of economic contraction, Estonia's GDP is forecasted to grow by a meager 0.1% to 1.5% in 2025. This lack of broad economic momentum limits job growth and wage gains, further constraining consumer spending.

• Low Consumer Confidence: As a result of these pressures, consumer confidence is exceptionally low, registering a reading of -34.4 in September 2025. This deep pessimism causes consumers to postpone major purchases, seek discounts, and reduce overall consumption, directly impacting TKM's sales in its more discretionary segments like Department Stores and Car Trade.

• Adverse Fiscal Policy: The Estonian government has enacted tax increases to consolidate its fiscal position, including raising the standard VAT rate from 20% to 22% in early 2024, with further hikes planned. These measures directly reduce the disposable income available to consumers, acting as a further drag on retail sales.

A critical consideration for investors is TKM Grupp's concentrated exposure to this challenging Estonian macro story. While the company has operations across the Baltics, its revenue base and brand identity are overwhelmingly centered in Estonia. This contrasts with some regional peers who may have a more balanced footprint. Currently, Estonia's economic outlook is the most difficult among the Baltic states, with Lithuania, for example, exhibiting more robust GDP growth. Consequently, TKM's performance is more tightly tethered to the fate of the struggling Estonian consumer, making the specific economic forecast for Estonia a paramount variable in assessing the company's future prospects.

Company-Specific Risks

In addition to the macroeconomic environment, TKM Grupp faces several internal and industry-specific risks:

• Cost Pressures and Margin Erosion: Rising labor costs are a significant and persistent headwind. Despite a stable workforce, staff costs have been increasing at a mid-single-digit pace, directly compressing operating margins. With wage growth in Estonia expected to remain in the 4-5% range, this pressure is unlikely to abate soon.

• Intense Competition: The Baltic retail market, particularly in the grocery sector, is highly competitive and dynamic. TKM's supermarket segment has reportedly seen its revenue growth lag the market average, suggesting that it may be losing share to competitors, particularly discounters that thrive in an environment where consumers are highly price-sensitive.

• Cyclical Exposure: The Group's significant reliance on the highly cyclical Car Trade segment for a large portion of its profits makes its overall earnings profile vulnerable to economic downturns. A prolonged period of weak consumer confidence could keep this segment's profitability depressed for an extended period.

• Execution Risk: The potential benefits from large-scale strategic projects, most notably the new Maardu logistics center, are not guaranteed. Realizing the projected cost savings and efficiency gains depends on flawless execution and integration into the existing supply chain. Any delays or operational issues could defer or diminish the expected positive impact on margins.

5. 5-Year Scenario Analysis

This analysis presents three potential five-year scenarios for TKM Grupp, from fiscal year-end 2024 through fiscal year-end 2029. Each scenario is built upon a detailed financial forecast driven by fundamental assumptions about the macroeconomic environment and company-specific execution. The base financial data for this forecast is derived from the company's 2024 annual report and TTM results, with 40,729,200 shares outstanding.

Base Case: "Muddling Through"

Probability: 55%

This scenario assumes a slow and uneven recovery for the Estonian economy. Inflation moderates towards the European Central Bank's target of 2% by 2026, and consumer confidence gradually improves but remains below historical highs. TKM Grupp successfully realizes moderate efficiency gains from its new logistics center, which helps to stabilize operating margins against persistent wage inflation. The Car Trade and Department Store segments experience a modest cyclical recovery in line with the broader economy.

• Key Fundamental Assumptions:

  • Revenue Growth: A conservative 1.5% in 2025, reflecting continued weakness, followed by an acceleration to 2.5% in 2026 and an average of 3.0% annually from 2027-2029, tracking nominal GDP growth.

  • EBITDA Margin: A gradual recovery from the 2024 level of 6.8% to 8.2% by 2029, as logistics savings are partially offset by ongoing cost pressures.

  • Capital Expenditures: Remains elevated at €30 million annually for 2025-2026 to fund store renovations and digital initiatives, before normalizing to €25 million per year.

  • Dividend Policy: The dividend per share grows modestly from the current €0.65 base, with the payout ratio managed towards a sustainable level of approximately 70% of net income.

  • Terminal Valuation: The company is valued at an 8.0x EV/EBITDA multiple in 2029, consistent with a mature, stable retail business with modest growth prospects.

High Case: "Baltic Resilience"

Probability: 15%

This optimistic scenario envisions a stronger and faster-than-expected economic rebound across the Baltic region. A sharp recovery in consumer confidence, fueled by falling inflation and rising real wages, drives a rebound in discretionary spending. TKM Grupp's strategic investments in logistics and e-commerce yield significant returns, leading to both market share gains in the supermarket segment and material margin expansion. A strong cyclical upswing in the automotive market further boosts profitability.

• Key Fundamental Assumptions:

  • Revenue Growth: Accelerates to 3.0% in 2025 and averages a robust 5.0% annually from 2026-2029, outpacing nominal GDP growth.

  • EBITDA Margin: Expands significantly, reaching 9.5% by 2029 as the company effectively leverages its improved cost structure and scale in a stronger pricing environment.

  • Capital Expenditures: Consistent with the base case.

  • Dividend Policy: The dividend grows more rapidly, supported by stronger earnings growth, while the payout ratio is maintained at a conservative 65%.

  • Terminal Valuation: A higher terminal multiple of 9.0x EV/EBITDA is applied, justified by the company's improved growth profile and higher profitability.

Low Case: "Protracted Stagnation"

Probability: 30%

This conservative scenario models a prolonged period of economic stagnation in Estonia, characterized by sticky inflation and anemic GDP growth. The government's fiscal consolidation measures have a more severe and lasting negative impact on consumer spending than anticipated. Intense price competition, particularly from hard discounters, leads to a structural erosion of margins in the core supermarket business. The car market remains weak, and the department store segment fails to return to meaningful profitability.

• Key Fundamental Assumptions:

  • Revenue Growth: Stagnates at 0.5% in 2025 and averages just 1.5% annually from 2026-2029, failing to keep pace with inflation (i.e., negative real growth).

  • EBITDA Margin: Fails to recover from current levels, remaining compressed in a tight range of 7.0% to 7.2% as the company is unable to pass on rising costs to consumers.

  • Capital Expenditures: Reduced to maintenance levels of €20 million annually after 2026 to conserve cash.

  • Dividend Policy: The dividend is cut further to a more sustainable level or potentially suspended to preserve the balance sheet. For modeling purposes, a 50% cut to €0.33 per share is assumed.

  • Terminal Valuation: The business is assigned a lower terminal multiple of 7.0x EV/EBITDA, reflecting its diminished growth prospects and higher perceived risk.

Financial Projections and Valuation Summary

The detailed financial projections for each scenario are presented below:

The valuation outcomes for each scenario, including the projected share price trajectory, are summarized below.

| Scenario Analysis | Probability | FY2029E Target Price (€) | 5-Yr Total Return (CAGR) | Share Price Trajectory (€) | | | | | | | :--- | :--- | :--- | :--- | Y0 (Now) | Y1 | Y2 | Y3 | Y4 | Y5 (Target) | | Low Case | 30% | €8.15 | -0.2% | €9.21 | €8.95 | €8.78 | €8.64 | €8.42 | €8.15 | | Base Case | 55% | €13.38 | 9.9% | €9.21 | €9.84 | €10.51 | €11.23 | €12.19 | €13.38 | | High Case | 15% | €21.60 | 22.0% | €9.21 | €11.55 | €13.84 | €16.11 | €18.66 | €21.60 | | Probability-Weighted Outcome | 100% | €12.56 | 8.5% | | | | | | |

STABLE BUT SLOW

6. Qualitative Scorecard

This scorecard provides a qualitative assessment of TKM Grupp across ten key metrics, each rated on a scale of 1 to 10. The scores are based on a holistic review of the company's strategic positioning, financial health, and governance.

SOLID BUT STRAINED

7. Conclusion & Investment Thesis

This analysis of TKM Grupp AS reveals a high-quality, market-leading Estonian retailer whose financial performance is currently being obscured by a perfect storm of macroeconomic headwinds. The confluence of high inflation, rising taxes, sluggish economic growth, and weak consumer confidence has created a uniquely challenging environment for the Estonian consumer, directly impacting TKM's sales and profitability. The market's reaction has been to price the company's shares for a protracted period of stagnation, reflecting peak pessimism.

The core investment thesis is predicated on the view that these severe headwinds are cyclical, not structural. For a long-term investor, this disconnect presents a potential opportunity to acquire a resilient, diversified market leader at a valuation that appears to price in little to no prospect of an economic recovery. The company's underlying stability, provided by its dominant supermarket business and its highly profitable real estate portfolio, combined with its strong and consistent cash flow generation, offers significant downside protection. A normalization of the economic environment in Estonia, which is expected over the medium term, provides a clear path to a re-rating of the shares as earnings recover.

Key Catalysts:

• Macroeconomic Improvement: A sustained decline in Estonian inflation and a corresponding recovery in consumer confidence would serve as the most powerful catalyst, directly boosting sales and margins in the economically sensitive Car Trade and Department Store segments.

• Margin Realization from Logistics: The successful implementation of the new Maardu logistics center should translate into tangible cost savings and efficiency gains. Evidence of this in quarterly financial reports would validate the company's strategic capital allocation and signal a recovery in core profitability.

• Stabilization of the Car Segment: A sustained recovery in the sales volumes and, more importantly, the profitability of the Car Trade segment would provide a significant lift to the Group's consolidated earnings.

Primary Risks:

• Prolonged Estonian Stagflation: The primary risk is that the current weak economic conditions persist, with a combination of stagnant growth and sticky inflation creating a "value trap" scenario where earnings fail to recover.

• Inability to Control Costs: If management is unable to offset persistent wage inflation and other rising operating costs through efficiency gains, the company could face a future of permanently lower margins.

• Balance Sheet Strain: A further deterioration in earnings could put the current dividend at risk and force management to make difficult capital allocation decisions, potentially including further dividend cuts or asset sales to manage its debt load.

CYCLICAL LOW

8. Technical Analysis, Price Action & Short-Term Outlook

The stock is trading below its 200-day moving average of approximately €9.50, a technical indicator of a bearish long-term trend. Recent price action has been weak, with negative momentum across 1-month, 3-month, 6-month, and 1-year timeframes, and the stock is trading near its 52-week low of €9.15. The short-term outlook is challenged, as the technical picture reflects the poor fundamental momentum and negative macroeconomic news, with most technical indicators signaling "Strong Sell".

BEARISH MOMENTUM