London, Nov 6 - With a big cash pile and plans to step up cost savings, Dutch supermarket group Ahold has plenty of firepower to boost its lowly valued shares.
And if it doesn't, the stock could benefit from speculation it will be a takeover target as the market for mergers and acquisitions starts to pick up.
"I think the downside risk on the shares is pretty limited now," said S&P Equity Research analyst James Monro, who rates Ahold a "strong buy."
"Either they're going to get the top-line moving, or there's going to be speculation that someone will come in and do it for them."
Ahold shares have underperformed the DJ STOXX European retail Index by 21 percent this year, due largely to the weakness of the U.S. grocery market where the group makes about 60 percent of its sales.
Despite strong gains this month, the stock trades at 11.1 times 2010 earnings forecasts, below international rivals like Wal-Mart on 12.8, Tesco on 12.9, Carrefour on 13.7 and Metro on 14.5.
As well as a price war and weak currency in its main U.S. market, Ahold is having to contend with falling food price inflation -- and in some categories deflation -- in Europe.
Last month, it reported the first quarterly decline in underlying sales at its market leading Albert Heijn chain in the Netherlands for around six years.
Yet Ahold is faring better than many competitors in Europe and is taking a share of the market away from rivals in the United States, having moved to revamp stores and cut prices before the recession.
Sales volumes grew in all of its markets in the third quarter, which Nomura analyst Matthew Truman said was a sign it was gaining market share, and volume growth at Albert Heijn was stronger than in the first half of the year.
Ahold, which trades from over 3,500 stores in 11 countries, also has plenty of scope to improve its performance.
For example, analysts expect it will announce cost-cutting plans for 2010 and following years along with its third-quarter results on Nov. 18, with some benefits coming from plans to unite its U.S. brands into a single operating company.
"The company said it would be 'sizeable' which means for us at least 300 million euros," said Exane BNP's Phillipe Suchet.
"This is a good way to offset the impact of deflation on margin, which was a major concern for the market regarding Ahold in the last quarters."
LOOKING FOR ACQUISITIONS
Ahold, which has little debt, has over 2.5 billion euros ($3.7 billion) of cash, which analysts think could be used for acquisitions, returned to shareholders, or a mix of the two.
Ahold signalled on Thursday it was gearing up to expand by appointing new managers for the day-to-day running of its U.S. and Dutch businesses, thereby freeing up the heads of both regions to focus on growth opportunities.
"This is the clearest sign yet from the company that it is considering acquisitions and is seeking to expand the group," said Credit Suisse analyst Andrew Kasoulis, adding it was most probably looking to a buy a mid-sized U.S. competitor.
Ahold has said it would look to its expand in existing and adjacent markets.
In the United States, that is likely to mean growing beyond its strongholds in the northeast and mid-Atlantic states to achieve greater economies of scale.
In Europe, the focus is likely to be Belgium and Germany.
This is at a time when Carrefour is struggling with its hypermarkets in Belgium and Metro with its Real supermarket chain in Germany.
Both have said they could look to sell if they fail to turn around their businesses, though analysts cautioned the stores might not be the right size or in the right locations for Ahold.
TAKEOVER TARGET
RBS analyst Justin Scarborough reckons Ahold is unlikely to make a big acquisition, pointing to the questionable value of large deals in the sector in the past and to Ahold's track record of returning cash to shareholders.
He thinks the group will look for smaller bolt-on purchases, like Belgian rival Delhaize's deal earlier this month to buy most of bankrupt U.S. chain BI-Lo for $425 million, which would still allow it to hand back some capital to investors.
If Ahold does not manage to boost its shares, some analysts think it could attract a takeover bid.
ING analysts said earlier this week that buying Ahold would be a way for Tesco to expand its footprint in western Europe and add a successful, established business in the United States to its own fledgling, loss-making operations there.
They suggested a takeover price of 12.8 euros a share, compared with the current price of around 9 euros.
Tesco and Ahold have declined to comment, and other analysts are sceptical, saying Tesco has enough on its hands with expansion in China, India and financial services, and would not want to add to its near 10 billion pounds ($17 billion) of debt.
But there are alternatives.
One long-mooted deal is a tie-up between Ahold and Delhaize, which is also focused on the eastern United States.
"It makes much more sense for them (Ahold) to buy Delhaize than for Tesco to buy Ahold," said S&P's Monro, noting that buying Delhaize would fulfil Ahold's growth ambitions in both the United States and Europe, and create significant synergies.
The synergies would be lower for Tesco, which is building its U.S. business in the west of the country, he added.