Put cash-rich Ahold on your shopping list

A trading update this month revealed Ahold plans to use €1.5bn of the proceeds from the €2.5bn sale of its 60 per cent stake in Scandinavian supermarket Ica to boost its ongoing share buyback programme from €500m to €2bn by 2014. Based on the current share price, that would mean a share count reduction of over 15 per cent, which will be nicely enhancing to EPS.

The commitment to return capital also demonstrates that Ahold remains firmly focused on its core markets and will allay fears that the cash might be used for a larger-scale acquisition. However, with €1bn still in the bank and last year's free cash flow coming in at €1.2bn, there is still plenty of money to invest in growth. It's likely that a number of options will be considered, such as smaller deals to accelerate penetration into Belgium and strategic acquisitions in US markets where Ahold is already a dominant player.

Ahold's top market share position, and weak competition, in almost all of the areas in which it operates in the US is a clear reason to like the stock. Stop & Shop, for instance, has the biggest grocery market share in New England, while Giant has by far the largest chunk of the market in the Washington DC and Baltimore regions. What's more, US operations, which account for 61 per cent of group sales and 56 per cent of underlying operating profit, continue be expanded. In the year to December, for example, Giant acquired and converted 15 Genuardi’s stores from rival Safeway in Philadelphia.

Similarly, Albert Heijn has opened nine supermarkets Belgium in the past year, bringing the total to 11, and acquired 82 Jumbo stores in Holland - soon to be converted to the Albert Heijn format. Holland is the other major geography for the group, generating a third of sales and 43 per cent of profit. This focus on core markets is positioning Ahold for further growth and has already started to pay off. Last year sales rose 3.5 per cent at constant exchange rates, while first-quarter sales in the current financial year grew 4.4 per cent, with 1.9 per cent like-for-like growth in the US and 1.8 per cent in Holland, and a flat underlying operating margin of 4.1 per cent.

The business is also highly cash generative and is on track to deliver €600m of savings from its 2012-2014 cost reduction programme. The first-quarter update brought further good news that Ahold has renegotiated its status in a US multi-employer pension fund through a €63m settlement, which means it will only be responsible for its own commitments within the fund - a hefty burden lifted off its shoulders.

True, sales in the Czech Republic and Slovakia are struggling, impacted by a VAT increase, fierce competition and high unemployment, but the regions represent just 5 per cent of total revenue and market share is improving. Expansion into Belgium and the acquisition of non-food online retailer Bol.com last year will weigh on margins in the short-term, but there is potential to curb margin falls elsewhere - improved consumer confidence in Holland and a US recovery should help. Finally, Ahold's online grocery businesses, Peapod in the US and albert.nl in Holland, are posting double-digit growth, with the latter now serving 67 per cent of the country. Peapod's services and innovations - such as virtual grocery stores in train stations - put UK supermarkets' online offerings to shame.

Going cheap

Source: Bloomberg, *Cantor Fitzgerald