Ahold Delhaize (OTCQX: ADRNY) (OTCQX: AHODF) (hereafter “Ahold”) is best known for its chain of grocery stores in the Netherlands, Belgium and the US East Coast, but investors overlook the company’s all-important online exposure easily. The Ahold-owned website bol.com could easily be considered “the Amazon of the Netherlands” and the company has considered listing Bol.com as a separate entity, which would likely unblock a lot of hidden value on the balance sheet.
I would strongly recommend trading Ahold shares on Euronext Amsterdam where the stock trades with AD as a stock symbol. With an average daily volume of around 3 million shares, the liquidity in Amsterdam is significantly higher than any secondary listing, while the Amsterdam listing also offers options that allow for a write-and-sell strategy. Ahold’s current market capitalization is approximately €27 billion. I will be using the EUR as my base currency throughout this article.
A solid result in 2021, but the reported free cash flow was affected by non-recurring events
In 2021, Ahold recorded total revenue of €75.6 billion, an increase of approximately 1% compared to fiscal 2020, despite fiscal 2020 containing an additional week. COGS also rose, but Ahold still managed to post a 0.5% increase in gross profit, which isn’t too bad considering the volatility of the grocery chain industry, as producers have raised prices and Ahold also has to deal with this.
Total operating income increased by around 50%, but this is mainly because the 2020 financial year was affected by non-recurring items which weighed on the income statement. 2021 was not completely immune to these items as some of the issues that were recorded in the income statement in 2020 only hit the cash flow statement in 2021, and I will discuss this further late in this article.
Pre-tax profit reported by Ahold Delhaize was €2.8 billion, resulting in net profit of €2.25 billion on EPS of €2.18. Keep in mind that EPS is based on the average share count of 1.03 billion shares, while the current share count is down to around 1 billion shares, around 3% lower . This means that if we had calculated the EPS based on the current number of shares outstanding, the EPS would probably have been around EUR 2.25 per share.
A good result, but I’m mostly interested to see how much free cash flow the company was able to generate as that’s what will ultimately fund the dividend payment as well as aggressive share buybacks.
Ahold reported operating cash flow of €6.36 billion and approximately €5.8 billion, including tax payments due in fiscal 2021 (which were lower than cash outflows related to taxes). We must also deduct the 138 million euros in interest payments as well as the 1.57 billion euros in lease payments. Adjusted operating cash flow was approximately €4.1 billion.
As you can see in the image above, the total capex was around €2.37 billion, but the investing cash flow also contains around €147 million of lease payments received as well. as dividend and interest income. Thus, the free cash flow generated in 2021 was around 1.9 billion euros.
Underlying free cash flow was much stronger as the company’s cash flow statements include approximately 380M EUR paid in connection with a tax claim in Belgium while an additional cash payment of €170 million was spent on pension liabilities in the United States. On an underlying basis, the free cash flow result was around 2.2 billion euros (and this includes the tax payment higher than what is actually due for the 2021 financial year).
Ahold Delhaize is cautious for 2022
For 2021, Ahold expects to pay a dividend of EUR 0.95 and the company aims to keep the dividend unchanged for the current financial year. Additional attention will be paid to shareholder rewards as Ahold plans to complete another €1 billion share buyback program, which is expected to reduce the number of shares by a further 3%. This will further improve EPS and FCFPS while the dividend payout ratio will decrease as there will be fewer hungry mouths to feed.
Ahold Delhaize will certainly feel the pain of inflation as well as supply chain issues and has released a rather loose outlook for 2022.
As you can see from the image above, the company is targeting a free cash flow result of 1.7 billion euros. Although this is slightly better than the reported result of just over 1.6 billion euros in 2021, it is around 20% lower than the underlying free cash flow result in 2021 after filtering out the elements non-recurring (payment of Belgian tax and payments related to pensions).
the ambitions for 2025 are quite positive. The company aims to increase revenue by €10 billion per year while also expecting a high single-digit EPS increase from 2022. Although Ahold did not provide detailed guidance on EPS for 2022, it said it expects low to medium revenue. single digit from EPS of EUR 2.17 in 2021. Assuming 2022 EPS will reach EUR 2.05, a continued increase of 8% (which is my interpretation of “high single digit increase” would result in 2025 EPS of EUR 2.58 Part of the EPS increase will be generated by business operations, but the impact of the extensive share buyback plans that allow Ahold to repurchase about 3% of its number of shares on an annual basis. Almost half of the EPS increase in 2025 will likely be caused by the share buyback program.
Ahold’s balance sheet also contains a lottery ticket. Bol.com is the company’s online platform and is comparable to Amazon (which only recently entered the Netherlands). Bol.com contributed approximately €162 million in free cash flow to Ahold in 2021, and the platform continues to grow as several hundred new merchant partners have been added to the pool and revenue has increased by nearly 20%.
I currently don’t have a long position in Ahold because all of my written put options have expired out of the money in the past two years. Although I’ve had a good feedback on these options, it means I still don’t own a single stock of Ahold, but I’d like to change that. It’s clear that 2022 will be a “challenging” year for the business and while EPS and free cash flow performance will remain strong, the market may be disappointed when it sees a year-on-year decline from 2021. I think this could create opportunities and I’m planning to write additional put options this year as the recent decline in the share price will increase volatility levels which will positively impact premiums. options. Earlier today I wrote a P25 for April which resulted in an option premium of EUR 0.47 per share, but I will probably write more put options in the very near future. 2022 will be a tough year, but it could turn out to be a great year to start positioning as the underlying free cash flow will remain strong.