Brdr. A & O Johansen: A Quality Distributor in Scandinavia

Brdr. A & O Johansen is one of the leading distributors of technical installation materials in Denmark and an increasingly important player in Sweden. Focused primarily on serving professional customers in the construction and renovation industry, the company combines a broad product assortment with a strong omnichannel business model that integrates physical stores, digital platforms, and automated logistics. Through its “everything under one roof” strategy, ongoing investments in digitalization and warehouse automation, and increasing exposure to long term trends such as electrification, climate adaptation, and the green transition, Brdr. A & O Johansen aims to strengthen its market position while driving profitable growth. The question remains: Does this underfollowed Scandinavian distributor deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Brdr. A & O Johansen at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Brdr. A & O Johansen, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Brødrene A & O Johansen, commonly referred to as AO, was founded in 1914 in Denmark with the purpose of creating value for professional customers in the construction industry, a mission that remains at the core of the business more than a century later. AO operates as a leading distributor of technical installation products and building-related materials, primarily serving professional tradesmen, contractors, and construction companies across Scandinavia. The company focuses on supplying products essential to the renovation, maintenance, and modernization of buildings, offering everything from plumbing equipment, electrical supplies, workwear, cables, water infrastructure, and climate solutions to tools and general building materials. While the majority of sales are generated through the professional market, serving plumbers, electricians, installers, and construction firms, AO also operates a growing direct-to-consumer business through a portfolio of specialized online stores focused on DIY and home improvement. In 2025, the B2B segment accounted for approximately 82% of revenue while the remaining 18% came from B2C activities. AO’s strategy is built around making customers’ lives easier by functioning as a one-stop shop where professionals can source nearly everything they need under one roof. Rather than simply competing on the price of individual products or stock keeping units, the company is increasingly focused on selling integrated solutions that save customers time and reduce complexity. This approach strengthens customer relationships while improving margins, as customers tend to value convenience, reliability, and reduced hassle more than negotiating the lowest price on individual items. AO operates an omnichannel business model designed to meet customers wherever they are, combining a strong physical footprint with increasingly advanced digital capabilities. The company operates 55 physical stores in Denmark and nine in Sweden, generating approximately 9.300 daily customer interactions, while digital sales now account for more than half of group revenue. Customers can engage with AO through physical stores, webshops, mobile applications, digital ordering systems, and the AO365 concept, which provides tradesmen with 24/7 access to selected locations using digital keys. This hybrid model allows AO to combine the convenience and efficiency of digital ordering with local service, personal relationships, and advisory support when needed. Professional customers are often assigned dedicated service teams, making AO more of a sparring partner than simply a wholesaler. This close integration into customer workflows is particularly important for professional tradesmen, where time is money and delays on a construction site can quickly become costly. AO’s logistics infrastructure forms a crucial part of the business model. The company works with more than 1.000 suppliers and offers one of the broadest product assortments in the Scandinavian wholesale market, with roughly 600.000 SKUs available for sale. Its automated central warehouse in Albertslund and logistics centre in Horsens are major operational strengths, with around 90% of products picked automatically through robotics and warehouse automation. These investments support high service levels, fast delivery times, scalability, and operational efficiency while positioning AO to handle future growth without proportionate increases in costs. Geographically, the business is relatively insulated from geopolitical instability, as approximately 83% of purchases are sourced from Europe and more than 99% of sales are generated within Scandinavia. This localized supply chain reduces exposure to global disruptions and provides greater supply reliability compared to businesses heavily dependent on long and complex international sourcing networks. Another important characteristic of AO’s business model is its exposure to the repair, modernization, and maintenance market, often referred to internally as the ReMoVe market. Around 70% of B2B revenue comes from maintenance and renovation work, while only around 30% is tied to larger construction projects. This mix makes AO less cyclical than many companies exposed purely to new construction, as buildings still require repairs, upgrades, and maintenance regardless of broader economic conditions. Aging infrastructure, energy efficiency upgrades, stricter building regulations, and modernization trends further support long-term demand for many of AO’s products and services. AO’s competitive moat is primarily built on scale, logistics, customer relationships, omnichannel integration, and its broad product assortment.  One of the company’s strongest advantages lies in its position as a one-stop shop for professional customers. AO offers one of the broadest product ranges in the market, serving multiple trades rather than specializing in only one category. For professional tradesmen, reliability, availability, and convenience often matter more than finding the absolute lowest price on a single product. A plumber or electrician working on a project cannot afford delays caused by missing parts or unreliable suppliers. By offering a vast assortment through one supplier and enabling customers to consolidate purchases, AO becomes deeply embedded in customer workflows, reducing friction and saving valuable time. This naturally creates customer stickiness and increases switching costs. The company’s omnichannel model further strengthens its moat. AO combines physical proximity through local stores with digital convenience through webshops, mobile apps, and automated ordering systems. More than half of revenue is already generated digitally, yet the business still benefits from close local relationships and advisory services. This combination of digital efficiency and human interaction creates a hybrid model that is difficult for purely online competitors or traditional wholesalers to replicate. The AO365 concept, which provides 24/7 access to locations, adds another layer of convenience and integration into customer operations, particularly for tradesmen who often work outside normal business hours. AO’s logistics network and investments in automation represent another important competitive advantage. The company has spent heavily on robotics, warehouse automation, IT infrastructure, and logistics capacity, enabling around 90% of products to be picked automatically. This creates significant economies of scale, supports fast and reliable deliveries, and improves cost efficiency. Because AO already operates with large-scale infrastructure capable of supporting future growth, incremental revenue can potentially come with attractive operational leverage over time. These investments are costly and difficult for smaller competitors to replicate, particularly in a fragmented market. Customer relationships also strengthen AO’s competitive position. Dedicated service teams, advisory services, and competency centres allow AO to function not merely as a distributor but as a partner helping customers complete projects faster, cheaper, and with less complexity. As the company gradually shifts from product sales toward solution-based selling, it deepens these relationships and becomes more integrated into customer decision-making. This can strengthen loyalty and reduce price sensitivity, which supports both retention and margins. Finally, AO benefits from operating in a relatively resilient niche within construction. With approximately 70% of revenue tied to maintenance and modernization activities, the company is less exposed to fluctuations in new construction than many peers. Repair and maintenance demand tends to remain more stable even during weaker economic periods because buildings, electrical systems, water infrastructure, and heating systems still require ongoing servicing and replacement. Combined with AO’s scale, logistics capabilities, digital integration, and strong local customer relationships, this positions the company to steadily gain market share over time, supporting its ambition to grow consistently above market growth.

Management

Niels Axel Johansen serves as the CEO of Brødrene A & O Johansen, a role he has held for decades as part of the Johansen family’s long stewardship of the company. Born in 1939, Niels Axel Johansen represents the second generation of family leadership at AO and has played a central role in transforming the business from a traditional Danish wholesaler into one of Scandinavia’s leading distributors of technical installation materials. With more than half a century of managerial experience and deep knowledge of the wholesale industry in Denmark and across Europe, Niels Axel Johansen brings a rare combination of operational expertise, industry relationships, and long-term strategic thinking. Few executives have as much accumulated knowledge of the markets in which AO operates, particularly within plumbing, electrical installations, water infrastructure, and technical building materials. His long tenure has given him an intimate understanding of both customer needs and changing dynamics in the construction and maintenance industries. Before and during his leadership of AO, Niels Axel Johansen has been deeply involved in the ownership and governance of the business. He has served as a member of AO’s Board of Directors since 1979 and continues to play an active role in shaping the company’s strategic direction. Through family-related ownership structures, including Avenir Invest, the Johansen family remains an important shareholder in AO, aligning management with long-term value creation. This ownership structure reflects a long-term mindset rather than a focus on short-term quarterly performance, which is often characteristic of family influenced businesses. Under Niels Axel Johansen’s leadership, AO has consistently invested in logistics infrastructure, automation, digital platforms, and acquisitions to strengthen its competitive position. Rather than simply maximizing short-term profitability, the company has repeatedly reinvested in warehouse automation, robotics, IT systems, and omnichannel capabilities to build a stronger foundation for future growth. One of the clearest examples of Niels Axel Johansen’s strategic vision has been AO’s transformation into an omnichannel business. Long before digitalization became an industry standard, AO invested heavily in online ordering systems, mobile applications, and digital services designed to make life easier for professional customers. Today, digital sales account for more than half of group revenue, supported by an ecosystem that combines physical stores, digital channels, dedicated service teams, and solutions such as AO365, which allows tradesmen 24/7 access to locations. Under Niels Axel Johansen’s leadership, AO has increasingly shifted from merely selling products toward selling complete solutions, aiming to become an integrated partner in customers’ daily workflows rather than simply another supplier. This strategy helps customers save time, reduces operational friction, and strengthens customer loyalty while also supporting higher margins. Niels Axel Johansen has also overseen AO’s expansion through acquisitions, using targeted purchases to strengthen the company’s market position and product offering. Recent acquisitions such as AO Workwear, VVSKupp.no, Svenska VA Grossisten, and JMV Cables illustrate a disciplined approach focused on expanding competencies, strengthening category positions, and increasing relevance to customers. At the same time, AO has maintained a relatively conservative and resilient operating model, with the majority of sourcing taking place within Europe and more than 99% of revenue generated in Scandinavia, limiting geopolitical exposure and supply chain complexity. As a leader, Niels Axel Johansen appears highly focused on customer value creation, operational efficiency, and long-term positioning. The company frequently emphasizes its philosophy of “lending a hand” and becoming part of the customer team, which reflects a culture centered around service and practical problem solving. This mindset has helped AO build long-lasting relationships with tradesmen and construction customers, particularly within maintenance and modernization activities, which account for the majority of revenue and provide resilience across economic cycles. Given his deep industry expertise, decades of operational experience, and long-term ownership mindset, Niels Axel Johansen appears to have played an instrumental role in shaping AO into a market leader within technical wholesale distribution in Scandinavia. His emphasis on logistics, digitalization, customer relationships, and disciplined reinvestment aligns closely with AO’s ambition to grow faster than the market while strengthening its position as the preferred supplier for professional customers.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. AO’s ROIC history is more mixed and lower than what many high quality businesses typically achieve. While the company managed to generate ROIC above 10% in some years, particularly during the strong period between 2020 and 2023, returns have generally remained in the high single digits. This suggests that AO is a solid but relatively capital intensive business where strong operational execution is needed to generate attractive returns. The nature of AO’s business model places some limitations on ROIC because it requires meaningful investments in inventory, logistics infrastructure, warehouses, automation, and physical locations to support its service offering. One of the main reasons why AO’s ROIC has historically been relatively modest is the nature of the wholesale distribution industry. AO operates in technical wholesale, where margins are generally lower because the company distributes products from third party suppliers rather than manufacturing its own proprietary products. While AO adds value through logistics, service, advisory capabilities, and convenience, customers still compare prices across wholesalers, which naturally limits profitability. Even though AO benefits from scale and strong customer relationships, it remains a distributor, and distributors often generate lower margins than companies with more differentiated offerings. Lower profitability directly impacts ROIC. Another important reason for the lower ROIC is AO’s capital intensity. The company has invested heavily in building one of the strongest logistics and omnichannel infrastructures in the industry. AO operates an automated central warehouse in Albertslund and a logistics centre in Horsens, with approximately 90% of products picked automatically through robotics and automation. While these investments improve efficiency and strengthen the competitive moat, they also significantly increase invested capital. AO carries around 600.000 SKUs and works with more than 1.000 suppliers to support its one stop shop model. This broad assortment requires substantial working capital tied up in inventory, which weighs on returns. Maintaining a wide product selection and high availability is essential for customer satisfaction, but it also reduces capital efficiency. The fluctuations in AO’s ROIC over the past decade can largely be explained by market conditions. The stronger ROIC seen between 2020 and 2022, peaking at nearly 17%, was likely supported by unusually favorable conditions in construction, renovation, and DIY activity during and after the pandemic. During this period, earnings increased faster than invested capital, temporarily lifting returns. However, the decline back toward around 8% in 2024 and 2025 reflects weaker construction activity, normalization following the post pandemic boom, and continued investments in logistics, digital capabilities, acquisitions, and warehouse capacity. Because AO has continued investing for long term growth, the capital base has expanded while earnings have temporarily softened, mechanically lowering ROIC. That said, there are several reasons to believe ROIC could improve over time. First, AO’s heavy investments in automation, robotics, digital infrastructure, and logistics are designed to create scalability and operational leverage. Management has explicitly emphasized ambitions to become the most efficient player in the market and target an EBITDA margin of 10%, which would represent an improvement from historical levels. As warehouse automation and digital ordering continue to mature, AO should be able to handle more sales without proportionately increasing costs, improving profitability relative to invested capital. Second, the company is gradually shifting from selling individual products toward more solution based sales. Management has repeatedly highlighted that customers value convenience, advisory services, and complete solutions rather than simply focusing on the price of individual products. If AO succeeds in becoming more integrated into customer workflows and captures a larger share of customer spending through bundled solutions, this could support better margins and higher customer retention, which would benefit ROIC. Third, AO’s focus on repair, maintenance, and modernization activities should provide resilience over time. Approximately 70% of B2B revenue comes from maintenance and modernization rather than new construction. This makes the business less cyclical and could support more stable earnings growth once the construction market improves. The company also aims to grow at least 2% faster than the market annually and sees opportunities for organic expansion, particularly in Sweden and through digital channels. Looking ahead, I would not expect AO to suddenly generate exceptionally high ROIC because the underlying economics of wholesale distribution naturally require meaningful investments in inventory, logistics, and infrastructure. However, I do believe ROIC has the potential to improve from recent levels if management succeeds in improving margins, increasing digital penetration, and benefiting from past investments in automation and logistics. A normalized ROIC consistently in the low double digits appears realistic over time, particularly if the construction market stabilizes and AO achieves stronger operational leverage from its logistics platform. That would represent a solid outcome for a company operating in a relatively resilient niche with strong market positions in Scandinavia.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. AO’s equity development has been very encouraging. After a decline in 2016 and 2017, equity has increased every single year for the past eight years, growing from DKK 656 million in 2017 to DKK 1.668 million in 2025. This represents a significant increase in shareholder value over time and suggests that the company has consistently generated profits while maintaining a disciplined financial structure. Growth has naturally fluctuated from year to year, with particularly strong increases between 2019 and 2022, while growth has moderated more recently as construction activity weakened. Even so, equity still increased by 8,6% in 2025, which is a respectable result given the softer market conditions. One of the key reasons AO has been able to grow equity consistently is its business model and earnings profile. The company generates recurring demand through its strong position in repair, maintenance, and modernization activities, which account for around 70% of B2B sales. This part of the market tends to be more stable than new construction because buildings, plumbing systems, electrical infrastructure, and heating solutions still require maintenance regardless of economic conditions. As a result, AO has generally been able to remain profitable across different market environments, allowing retained earnings to accumulate on the balance sheet over time. Another important reason for equity growth is AO’s cautious approach to finances. Management aims to keep the solvency ratio above 40%, meaning a large part of the company is funded by its own equity rather than debt. AO ended 2025 with a solvency ratio of 40,7%, showing that management continues to prioritize a strong balance sheet. This is particularly important in an industry linked to construction, where activity can fluctuate from year to year. Having a strong financial position gives AO more flexibility to continue investing in warehouses, digital solutions, and acquisitions even during weaker market conditions, while also reducing financial risk. AO’s investments in warehouses, automation, robotics, IT platforms, and acquisitions also help explain the steady growth in equity. Rather than maximizing short term payouts, management has reinvested heavily into strengthening the business and expanding capabilities. Acquisitions such as AO Workwear, VVSKupp.no, Svenska VA Grossisten, and JMV Cables have helped broaden the product offering and strengthen market positions. While these investments may temporarily weigh on profitability and returns on capital, they can contribute to stronger long term earnings power and therefore support future equity growth. The slower equity growth seen in 2023 and 2024 likely reflects weaker market conditions in construction and normalization following the unusually strong post pandemic years. When activity slows, profitability tends to soften, which naturally reduces the pace of retained earnings growth. However, the fact that equity still increased during a difficult environment demonstrates resilience in the business model and suggests that AO remains financially disciplined even when market conditions are less favorable. Looking ahead, I believe equity is likely to continue growing over time, although probably not at the same pace as during the exceptionally strong years between 2020 and 2022. AO operates in a relatively resilient niche with significant exposure to maintenance and modernization, which should support steady profitability. The company also aims to grow at least 2% above market growth annually and continues to invest in digitalization, logistics, and expansion opportunities, particularly in Sweden. At the same time, the construction market remains cyclical, meaning equity growth will likely fluctuate from year to year depending on market conditions. However, given AO’s strong balance sheet, consistent profitability, and disciplined capital allocation, I would expect the long term trend of growing equity to continue.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share.  AO’s free cash flow has historically been quite volatile, with periods of very strong cash generation followed by years of much weaker free cash flow. This volatility is not necessarily a sign of a weak business but is largely explained by the nature of AO’s business model, which requires meaningful investments in warehouses, digital infrastructure, inventory, and day to day operations. While earnings have generally been relatively stable, the amount of cash generated has fluctuated significantly depending on investments and how much money becomes tied up inside the business. One of the main reasons AO’s free cash flow has been volatile is the company’s high level of investments. Management estimates that normal maintenance investments are around DKK 60 million to DKK 100 million annually, but AO has spent significantly more than that in recent years. In 2025 alone, investments amounted to DKK 200 million, with roughly one third going toward digital solutions and more than one third related to expanding the automated warehouse in Albertslund to increase capacity and efficiency. These investments are intended to support future growth and strengthen AO’s competitive position, but they temporarily reduce free cash flow because cash is being reinvested into the business. Management has already indicated that investments are expected to remain elevated in 2026 as AO continues investing in warehouses, software, digitalization, and growth initiatives. Another major reason for the volatility is that AO needs to keep a large amount of products in stock and often gives customers time to pay their bills. Because AO wants to offer everything under one roof, the company carries a very broad product assortment. This means more cash is tied up in products sitting on shelves and in payments that have not yet been received from customers. Management has explained that this has increased in recent years because the broader assortment requires larger inventories and larger customers increasingly negotiate longer payment terms. In simple terms, AO often has to spend money before it gets paid, which can temporarily reduce free cash flow even if the business is performing well. Management has also suggested that this higher level of cash tied up in the business is likely the new normal. The sharp swings in free cash flow over the years can also largely be explained by timing effects and investments. The very strong free cash flow seen in 2020 likely benefited from unusually favorable timing between customer payments, supplier payments, and strong demand. On the other hand, weaker years such as 2021, 2022, and 2024 were heavily impacted by large investments and more cash being tied up in products and customer payments. This means that free cash flow does not always move in line with profitability in a business like AO. A year with solid earnings can still result in weak free cash flow if the company is investing heavily or building up inventories to support growth. Looking ahead, I do expect free cash flow to remain somewhat volatile, but I also believe it has the potential to improve over the long term. In the near term, management has clearly communicated that elevated investments will continue, particularly in warehouse capacity, IT modernization, digitalization, and competencies to support future growth. These investments will continue to weigh on free cash flow in some years. At the same time, many of these investments are designed to improve efficiency and scalability. As the warehouse expansion matures and digital investments begin generating returns, AO should gradually become more efficient and convert a larger share of earnings into cash. If revenue continues growing while investments eventually move closer to normal levels, free cash flow could improve meaningfully. AO primarily uses its free cash flow in two ways. First, the company reinvests heavily into the business through warehouses, automation, robotics, digital solutions, IT systems, acquisitions, and expanding product offerings. Management has repeatedly emphasized its willingness to continue investing to ensure AO remains competitive and prepared for future customer needs. Second, AO returns a meaningful portion of cash to shareholders through dividends. The company currently targets paying out slightly above 50% of net profit as dividends and has done so for the past five years. For 2025, management proposed a dividend corresponding to approximately 52% of net income. Unlike some companies, AO does not appear focused on aggressive share repurchases, instead prioritizing reinvestment and maintaining a strong financial position while still rewarding shareholders with a growing dividend. The free cash flow yield suggests that the shares may be trading at an attractive valuation. However, given the volatility in free cash flow, it is important to look at valuation more broadly, which we will revisit later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to evaluate whether a company has a manageable debt level that can be repaid within three years, which is determined by dividing total long term debt by earnings. Analyzing AO’s financials, we find that the company has 2,75 years of earnings in debt. This is below the three year threshold and suggests that debt is manageable. Hence, debt is not a concern if investing in AO. It is also worth noting that management appears to take a disciplined and cautious approach to debt. AO has stated that it wants to maintain a debt level within a range it considers comfortable, and at the end of 2025 the company remained within this target. This is important because AO operates in an industry linked to construction activity, which can fluctuate depending on economic conditions. Maintaining a reasonable debt level gives the company more flexibility to continue investing in warehouses, digital solutions, and acquisitions even during weaker periods. Another reassuring factor is that AO has maintained a strong financial position despite several years of elevated investments in automation, warehouse expansion, IT systems, and acquisitions. Rather than taking on excessive debt to fund growth, management appears focused on balancing investments with financial stability. This reduces risk and should allow AO to continue growing while still maintaining resilience if market conditions become more challenging.

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Risks

Macroeconomic factors is a risk for AO because the company operates in the construction and renovation industry, which is naturally influenced by economic conditions, interest rates, inflation, business confidence, and general investment activity. Although AO has a more resilient business model than many construction related companies due to its large exposure to maintenance and modernization, the company is still affected when economic uncertainty causes customers to delay projects or reduce spending. One of the biggest macroeconomic risks for AO is weaker demand caused by lower willingness to invest. When households, businesses, or property owners become uncertain about the economy, they often postpone larger renovation projects or investments in buildings. This risk is particularly relevant for AO’s project related business. Approximately 30% of AO’s professional sales are tied to larger construction projects, which are more exposed to economic fluctuations. During periods of slower economic growth or increased uncertainty, fewer projects may be initiated, leading to weaker demand for AO’s products. Interest rates are another important risk factor. Higher interest rates make it more expensive for consumers and businesses to borrow money, which can reduce construction activity, renovations, and investments in buildings. This can negatively affect demand for installation materials, plumbing products, electrical supplies, and other products sold by AO. Because the construction industry is closely linked to financing conditions, prolonged periods of high interest rates could weaken market activity. Inflation and rising costs also represent a risk. Higher energy costs, wage inflation, and increasing raw material prices can reduce spending appetite across the economy. When costs rise and uncertainty increases, customers may choose to delay larger projects and focus only on essential repairs or maintenance. This can lead to lower demand in parts of AO’s business, particularly within project related activities. Geopolitical uncertainty further increases macroeconomic risk. Events such as conflicts, supply disruptions, or political instability can contribute to rising inflation, higher energy prices, and weaker economic growth. Management has highlighted that geopolitical tensions may increase uncertainty and reduce willingness to invest, which could negatively affect activity levels in the construction market. Even though AO sources most of its products within Europe and sells almost entirely in Scandinavia, the company can still be indirectly affected if geopolitical instability weakens economic activity or causes more volatile market conditions. The business is cyclical and dependent on economic conditions, interest rates, business confidence, raw material prices, and political developments. Therefore, there may be periods with weaker demand and lower earnings, which could also lead to significant share price volatility. While these risks may not materialize every year, macroeconomic factors remain an important risk to consider when investing in AO.

Competition is a risk for AO because the market for technical installation materials and construction related products is highly competitive, with several wholesalers competing for customers on price, product availability, service, and delivery speed. Professional customers such as plumbers, electricians, contractors, and construction companies often compare offers across suppliers, particularly when market activity slows. As a result, competition can put pressure on pricing and profitability, making it harder for AO to maintain margins while still growing market share. One of the biggest competitive risks for AO is pricing pressure. Management has repeatedly highlighted that competition remains fierce and that customers have become increasingly focused on negotiating prices, particularly in project sales. During periods where demand is weaker and wholesale capacity exceeds customer demand, competition tends to intensify even further. Customers often focus more heavily on obtaining discounts, and negotiations that were previously limited to larger projects increasingly extend to smaller orders as well. This can make it difficult for AO to maintain profitability, especially in project related activities where margins are already lower. Competition can also limit AO’s ability to pass higher costs on to customers. When input prices rise, such as for products containing oil or plastic, AO generally seeks to increase prices to protect profitability. However, management has acknowledged that in a highly competitive market it may not always be possible to pass these increases fully on to customers. If competitors are willing to accept lower margins to win market share, AO may be forced to absorb part of the cost increases itself, which could pressure earnings. Another important competitive risk comes from consolidation among customers. More installers and contractors are joining forces through mergers or becoming part of purchasing groups, allowing them to negotiate lower prices and broader service agreements. Larger customers typically have greater bargaining power because wholesalers compete aggressively for their business. This trend could gradually weaken AO’s negotiating position and increase pressure on prices and margins over time. If customers become larger and more concentrated, they may demand better pricing, longer payment terms, or additional services without necessarily paying more. Competition may also intensify if new competitors enter the market or if existing players expand their presence in Denmark and Scandinavia. The wholesale market is already competitive, and stronger competitors with significant scale or financial resources could challenge AO’s market share. Larger competitors may invest aggressively in digital solutions, logistics, or pricing to gain customers. Because AO aims to grow faster than the market and continue gaining share, stronger competition could make it harder to achieve these ambitions. The project business represents an additional competitive challenge. Management has explicitly noted that increasing project activity may negatively impact margins because competition in larger construction projects tends to be particularly intense. Winning projects often depends heavily on pricing, which can pressure profitability even if sales volumes increase. This creates a tradeoff where growth in revenue does not necessarily translate into stronger earnings if margins weaken at the same time.

Reliance on suppliers and service providers is a risk for AO because the company depends heavily on suppliers, logistics partners, and external service providers to ensure products are available and delivered efficiently to customers. AO does not manufacture most of the products it sells but instead relies on a large network of more than 1.000 suppliers to maintain its broad assortment and support its “everything under one roof” strategy. This means that disruptions outside AO’s direct control could negatively affect its ability to meet customer expectations and maintain operational efficiency. One of the biggest risks relates to product availability. AO’s business model is built around being a reliable one stop shop where professional customers can quickly obtain the products they need. If suppliers experience production problems, shortages, transportation disruptions, or delays, AO may struggle to maintain sufficient inventory levels. In industries such as plumbing, electrical installations, and construction, delays can be costly because tradesmen often need products immediately to complete jobs. If AO cannot supply critical products when needed, customers may choose competitors instead, which could result in lost revenue and weaker customer loyalty. Supply chain disruptions represent another important risk. Although AO sources the majority of products from Europe and sells almost entirely within Scandinavia, the company is still exposed to disruptions caused by geopolitical tensions, transportation issues, raw material shortages, or operational challenges among suppliers. Even temporary disruptions can create bottlenecks that limit product availability or increase costs. Since AO competes partly on reliability and fast delivery, prolonged supply chain issues could weaken its competitive position. AO also depends on external service providers to maintain efficient logistics and daily operations. The company relies on warehouses, digital systems, IT infrastructure, and transportation providers to ensure products move efficiently through the supply chain and reach customers on time. If a key logistics partner, software provider, or other important service provider experiences technical failures, cyber incidents, operational disruptions, or suddenly discontinues services, AO’s ability to process orders and deliver goods efficiently could be affected. This could result in delays, dissatisfied customers, and lower sales. Another challenge is that reliance on third parties can reduce control. Even if AO executes well internally, external providers may fail to meet expectations due to factors outside AO’s influence. Because the company’s reputation depends heavily on reliability, product availability, and service quality, failures elsewhere in the supply chain could still damage customer relationships and impact financial performance. Ultimately, reliance on suppliers and service providers remains an important risk because AO’s business depends on having the right products available at the right time. If disruptions lead to product shortages, delivery delays, or operational inefficiencies, customers may increasingly turn to competitors, which could negatively affect revenue, margins, and long term market share.

Reasons to invest

Structural trends is a reason to invest in AO because several long term trends are expected to increase demand for the products and services the company provides. AO operates in areas such as plumbing, electrical installations, water infrastructure, climate solutions, workwear, and building materials, which places the company in a favorable position to benefit from major developments such as the green transition, electrification, digitalization, and climate adaptation. These trends are likely to require significant investments across buildings, infrastructure, and energy systems over many years, potentially creating durable growth opportunities for AO. One important structural trend is the green transition. The construction industry is one of the largest contributors to carbon emissions, which has increased pressure from governments, regulators, and customers to improve energy efficiency and reduce environmental impact. This creates growing demand for more sustainable building materials, energy efficient systems, and certified products. AO is well positioned to benefit because the company already supplies many of the products needed for this transition, including heat pumps, water saving systems, insulation related products, and other energy efficient installation materials. As buildings are renovated to meet stricter environmental standards and lower energy consumption, demand for AO’s products could increase over time. The company has also positioned itself as a partner helping customers navigate the green transition by offering solutions that make sustainability more practical and commercially attractive. Electrification represents another major long term opportunity. Across society, fossil fuel based systems are increasingly being replaced by electricity, creating demand for new infrastructure and installation work. This includes charging infrastructure for electric vehicles, electrical upgrades in buildings, heat pumps replacing oil and gas heating systems, and broader modernization of energy systems. Because AO supplies electrical products, cables, climate solutions, and technical installation materials, the company is exposed to many parts of this trend. Electrification of homes, buildings, and industries is expected to require significant investments over many years, potentially supporting long term demand for AO’s products and services. Climate adaptation is another trend that could create meaningful opportunities. More extreme weather, heavier rainfall, and rising concerns about flooding are increasing the need for investments in water infrastructure, drainage systems, and stormwater management. In countries such as Denmark and Sweden, this may lead to increased spending on systems designed to manage rainwater, improve water treatment, and reduce flood risks. AO already supplies products related to water infrastructure, plumbing, and drainage systems, which positions the company to benefit if investments in climate adaptation accelerate over time. Urban solutions such as green roofs, drainage systems, and rainwater reuse may also create additional demand. Another attractive aspect of these structural trends is that many of them overlap and reinforce one another. For example, the green transition often requires electrification, while climate adaptation frequently involves modernization of water infrastructure and buildings. Many of these changes require the exact types of installation materials, technical expertise, and product availability that AO already provides. Because these trends are expected to unfold over many years rather than quarters, they could create a long runway for growth.

Everything under one roof is a reason to invest in AO because the strategy has the potential to strengthen customer relationships, increase sales, improve margins, and further differentiate the company from competitors over time. Rather than focusing only on selling individual products, AO is gradually expanding its assortment and positioning itself as the preferred supplier where professional customers can source nearly everything they need in one place. For tradesmen and construction companies, time is often just as important as price. By making it easier for customers to purchase a broader range of products through a single supplier, AO aims to become more deeply integrated into customers’ daily workflows and increase customer loyalty. A key part of this strategy is expanding the product assortment across stores and digital channels. AO already offers one of the broadest assortments in the industry, with around 600.000 products available for sale, and management continues to invest in adding more categories and products to support the “everything under one roof” concept. The idea is simple but powerful. If an electrician, plumber, or contractor can buy everything needed for a project from AO rather than splitting purchases across several suppliers, it saves time, reduces complexity, and makes day to day operations more efficient. This convenience creates an incentive for customers to consolidate more spending with AO, potentially increasing wallet share over time. The strategy also supports a shift from selling individual products to selling broader solutions. Management has repeatedly emphasized that customers increasingly value complete solutions because they reduce hassle and simplify project execution. Instead of competing only on the price of a single item, AO can increasingly become a problem solver and advisor helping customers complete projects faster and more efficiently. This is important because customers tend to view complete solutions differently than individual products, which can reduce price sensitivity and support stronger margins over time. There are already signs that the strategy is gaining traction. Management has highlighted that customer visits to AO stores reached record levels in 2025, averaging approximately 9.300 daily customer interactions, up 6% from the previous year. According to management, customers are gradually changing habits and increasingly recognizing the value of AO’s broader assortment, with new sales categories growing week by week. Because changing purchasing habits takes time, management sees this as a long term journey rather than a quick transformation. However, growing store traffic and organic growth in both B2B and B2C suggest that customers are increasingly responding positively to the offering. The “everything under one roof” concept may also improve profitability over time. After years of declining margins, AO’s gross margin improved from 23,3% to 24,3% in 2025, with both B2B and B2C contributing positively. Management has explicitly linked part of the improvement to broader assortments and stronger customer engagement. When customers purchase more categories from AO or buy complete solutions rather than individual items, the company can potentially earn better margins than in situations where customers focus only on negotiating the lowest price for a single product. Importantly, AO is backing this strategy with meaningful investments. Warehouses, automation, digital tools, IT systems, and expanded assortments are all designed to support the ability to offer customers a seamless experience across physical stores, webshops, and apps. Because AO already has much of the infrastructure in place, future growth could gradually become more efficient as customers increase spending within the ecosystem.

Acquisitions is a reason to invest in AO because management increasingly sees mergers and acquisitions as an important driver of long term growth alongside organic expansion. Rather than relying solely on market growth, AO has demonstrated an ability to strengthen its product assortment, enter new geographic markets, add competencies, and improve profitability through targeted acquisitions. Recent acquisitions suggest that management follows a disciplined approach focused on businesses that complement AO’s strategy, strengthen the “everything under one roof” concept, and create opportunities for cross selling and operational synergies. One of the clearest reasons acquisitions are attractive is that AO has already demonstrated encouraging execution. The companies acquired in 2024, AO Workwear, VVS Kupp, and Svenska VA Grossisten, all performed strongly in 2025. Combined revenue increased by 23% compared to the previous year, while earnings increased by an impressive 85%. This suggests that AO has so far been successful at integrating acquired businesses and helping them grow faster within the broader AO ecosystem. Importantly, acquisitions have not only contributed to revenue growth but have also supported profitability. Management noted that acquisitions contributed positively to margin expansion in 2025, helping lift gross margins from 23,3% to 24,3%. Geographic expansion is another attractive aspect of AO’s acquisition strategy. Historically, the business has been heavily focused on Denmark, but management has made it clear that AO aims to become a more Scandinavian player over time. The acquisition of Svenska VA Grossisten marked AO’s entry into the Stockholm region and has already enabled AO to establish several new stores in Sweden. In only two years, AO doubled its Swedish store footprint from five to ten locations and plans further expansion. Acquisitions can therefore accelerate growth in markets where AO still has relatively low market penetration and where management sees significant long term opportunities. Another reason acquisitions are attractive is that they can strengthen AO’s positioning in structural growth areas. The acquisition of JMV Cables in early 2026 is a good example. Beyond adding approximately DKK 125 million in revenue, the acquisition strengthens AO’s position within medium voltage cables and infrastructure projects linked to electrification. Management has specifically highlighted growing demand for larger and more specialized cable solutions driven by the electrification trend. JMV Cables also adds technical expertise and advisory capabilities, helping AO better serve larger projects and deepen customer relationships. This suggests management is not only buying revenue but also strategically adding competencies and exposure to attractive long term growth trends. The B2C segment also appears to be an important area for future acquisitions. The acquisition of VVS-Eksperten, effective from early 2026, further strengthens AO’s portfolio of online DIY businesses in Denmark. Because the B2C business operates at meaningfully higher margins than B2B, successful acquisitions in this segment could potentially improve the profitability of the group over time while strengthening AO’s digital position. Importantly, AO appears to take a disciplined approach to acquisitions. Management has repeatedly stated that they actively monitor opportunities in both B2B and B2C but focus on businesses that fit strategically and strengthen AO’s long term ambitions. Recent acquisitions have been completed without issuing new shares, meaning growth has not come at the expense of shareholder dilution. Combined with AO’s strong balance sheet and manageable debt level, this provides flexibility to continue pursuing attractive opportunities in the future.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,30, which is from 2025. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,7% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on AO's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 62,33. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy AO at a price of DKK 31,17 (or lower, obviously) if we use the Margin of Safety price.

To calculate the Ten Cap price, I start with operating cash flow and subtract maintenance capital expenditures, as these are the investments needed to maintain the business. AO generated DKK 312 million in operating cash flow last year. While reported capital expenditures were higher, management has stated that normal maintenance investments are between DKK 60 million and DKK 100 million annually, so I use DKK 80 million in my calculation. I then add back the tax provision of DKK 59 million to better reflect normalized owner earnings. With 27,2 million shares outstanding, the calculation is as follows: (312– 80 + 59) / 27,2 x 10 = DKK 106,99 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With AO's Free Cash Flow Per Share at DKK 6,55 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 75,24.

Conclusion

I believe that AO is an intriguing company with strong management. Its competitive moat is built on scale, logistics, customer relationships, omnichannel integration, and a broad product assortment that makes the company an important partner for professional customers. While AO has historically generated a relatively low return on invested capital, this is mainly a reflection of the wholesale distribution industry and the capital intensive nature of the business rather than a sign of poor quality. Therefore, the lower ROIC does not necessarily mean that AO cannot be a quality business or a good investment. Free cash flow has been volatile over the years due to the cyclical nature of the construction and renovation market, as well as elevated investments in warehouses, automation, digitalization, and inventory, but I expect free cash flow to improve over the long term as these investments mature and efficiency improves. Macroeconomic factors remain a risk because AO operates in an industry where demand is influenced by economic conditions, interest rates, inflation, and general willingness to invest. During periods of uncertainty, customers may postpone larger projects and renovations, which can negatively affect growth and profitability. Competition is another risk because the market for technical installation materials is highly competitive, with wholesalers competing heavily on price, product availability, service, and delivery speed. Intense competition, particularly in project sales and during weaker market conditions, can pressure margins, limit AO’s ability to pass higher costs on to customers, and make profitable growth more difficult. Reliance on suppliers and service providers is also a risk because AO depends heavily on external partners to ensure products are available and delivered efficiently. Disruptions among suppliers, logistics partners, or technology providers could lead to product shortages, delivery delays, or operational challenges that may weaken customer relationships and cause customers to turn to competitors. At the same time, there are several reasons to be optimistic about AO’s long term prospects. Structural trends such as the green transition, electrification, and climate adaptation are expected to drive demand for many of the products AO supplies, including electrical components, water infrastructure, climate solutions, and installation materials. The “everything under one roof” strategy is also an attractive reason to invest because it can strengthen customer loyalty, increase sales, and improve margins over time by making AO the preferred supplier for customers’ daily needs. By offering a broad assortment and increasingly selling complete solutions rather than individual products, AO can save customers time, deepen relationships, reduce price sensitivity, and potentially capture a larger share of customer spending. Acquisitions are another attractive growth driver, as management has demonstrated an ability to use targeted acquisitions to strengthen the product assortment, enter new markets, improve profitability, and support long term growth. Recent acquisitions have performed well, contributed to higher margins, strengthened AO’s position in structural growth areas such as electrification, and expanded the company’s presence in Sweden and higher margin B2C categories. Overall, I believe there are many things to like about AO, and buying the shares below the Ten Cap price of DKK 106 could prove to be a good long term investment.

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