Componenta Q2'24 earnings preview: Waiting for recovery

Translation: Original comment published in Finnish on 7/22/2024 at 7:03 am EEST.

Componenta will release its H1 report on Tuesday, July 23 at 8:00 am EEST. Our expectations for Q2 volume and earnings development are rather conservative, which will put some pressure on H2'24 forecasts if and when Componenta reiterates its earlier guidance for 2024. We find the stock's valuation attractive.

Looking for signs of recovery in H1 report

There is no meaningful consensus forecast for Componenta. We expect Q2 revenue to decline significantly (-13% y/y) from Q2'23, as the order book at the end of Q1'24 was down 5% y/y. Our forecast is somewhat cautious due to the fact that Componenta already stated in its Q1 report that customers' order books had started to show signs of recovery as the quarter progressed, and customers' own inventory levels were also described as being quite low. However, these factors may not yet be reflected in Componenta's Q2 revenue. Uncertainty in Q2 revenue is also increased by the ramp-up of volume products for serial production, which continued in Q1. We assume that there have been no further major production disruptions in Q2 (such as the transport workers' strike in Q1 and quality problems in the above-mentioned volume ramp-ups). In addition, the market prices of key production factors (pig iron, scrap, electricity) have been declining at a slowing pace year-on-year. The main driver of profitability is therefore volume, which we estimate to have remained at an unsatisfactory level in Q2. Our forecast for the EBITDA margin (6.7%) is lower than a year ago (8.8%) and the EBIT margin is close to zero. Our estimate for net financing costs (-0.4 MEUR) is lower than last year, but they still push earnings per share slightly below zero.  

Componenta must outperform target market in H2

Componenta has guided for an improvement in net sales and EBITDA in 2024 compared to 2023. The benchmark is low, as H2'23 was very weak. As Componenta's H1 report is published early in the earnings season, the Q2 reports and market comments from the company's assumed customers (e.g. AGCO's tractor manufacturing, Cargotec, KONE, Konecranes, Metso, Wärtsilä, Ponsse) have not provided much support for the forecasts for the rest of the year. Several companies (e.g. Volvo, AGCO, Deere) have negative expectations for market demand in 2024 for construction machinery, trucks, tractors and forest machines, for example. However, Componenta has previously indicated that the 2024 revenue will be supported by the aforementioned ramp-up of volume products and an increase in the company's market share. The 50 MEUR order from the Finnish Defence Forces for mortar shell-tail assemblies, which Componenta announced at the end of May, is for the years 2025-2028 and therefore does not affect the 2024 numbers.       

If Componenta's Q2 numbers turn out as we forecast, the company's 2024 guidance would require at least +26% y/y revenue growth and an EBITDA of 3.6 MEUR (margin 6.9%) in H2’24. Our current forecast for H2'24 is +32% y/y revenue growth and an EBITDA margin of 11.2%. In its guidance, Componenta has emphasized a clear focus on revenue and EBITDA for H2. Nevertheless, achieving our forecasts will not be easy and will require good volume growth and trouble-free operations. In any case, we expect the guidance to be repeated. In the H1 report, we are also interested in the half-yearly breakdown of revenue by customer sector and comments on this, as well as the outlook for various cost drivers (raw materials, energy, wages). 

The stock is cheap

Componenta's share price has fallen 11% since our last update, and as our forecasts are unchanged, the valuation multiples have come down. Using 2025 figures, the total return is now +22% p.a. (price potential +18% and dividend yield +4%), which is well above the 12% ROE requirement. Calculations based on EV/EBIT or P/E ratios paint an overly negative picture of the potential return, as these ratios are currently subject to significant leverage. This is due to Componenta’s temporarily disproportionately low EBIT and EPS ratios compared to EBITDA. Although the relative valuation multiples are distorted by the same factors, the discount of the 2025 EV/EBIT and P/E multiples relative to the peer median is still at the -25% level that we accept for Componenta. The DCF model indicates a +36% upside for the stock, implying that the stock is cheaply priced overall.