Koskisen Q1 on Tuesday: Profitability under strain from market conditions and strike losses in the first months of the year

Translation: Original comment published in Finnish on 5/10/2024 at 6:53 am EEST.

Koskisen will report its Q1 results on Tuesday. Koskisen is facing tough comparison figures in Q1, which we believe the company has fallen far behind due to a much tighter market situation and the postponement of deliveries as well as additional costs caused by the political strikes in Finland. For the current year, Koskisen is expected to reiterate its Q1 guidance for revenue growth and an adjusted EBITDA margin of 8-12%. On the demand side, the picture seems to be moving in a cautiously positive direction based on the recent news flow and Q1 reports from peers, although the construction industry is still going through a tough time. On the cost side, the high price of logs poses a challenge for Koskisen as well. We will not change our view on Koskisen before the Q1 report, as we believe the cyclical turnaround and the risks ahead are well balanced in the share price.

We expect revenue to miss comparison figures, as strikes have delayed deliveries

As far as we know, Koskisen was able to maintain production in both businesses with minimal problems in Q1 despite the political strikes. We expect that Koskisen’s revenue decreased by 7% in Q1. In the Sawn Timber Industry, Koskisen has significantly more capacity than in the comparison period with the new saw line in Järvelä, but we estimate that March deliveries in both businesses (but especially in the Sawn Timber Industry) have been shifted significantly to Q2 due to the disruption of sea logistics caused by the political strikes in Finland. In the Panel Industry, demand in Q1 was probably similar to H2'23, i.e. weaker than in the comparison period. The disruption of imports into Finland may have provided some support for chipboard demand in the Panel Industry in Q1. We expect average prices for both businesses to have remained broadly stable in Q1, with the Sawn Timber Industry continuing to suffer from a lackluster construction sector and the Panel Industry continuing to see war-related supply disruptions pushing up birch plywood prices despite the leaking Russia sanctions.

Earnings likely under pressure in both businesses

We forecast that Koskisen’s adjusted EBITDA decreased by about 53% in Q1 to 5.9 MEUR.  This corresponds to a lukewarm adjusted EBITDA margin of 8%, similar to Q4'23. We expect the Panel Industry's result to decline markedly due to lower volumes than in the comparison period and the high price of birch logs. Our forecast for the Sawn Timber Industry is also lower than in the comparison period, as the new saw line in Järvelä may not have been running at full throttle and strike-related delays in deliveries are eroding margins. Other operations recorded a profit of as much as 1.2 MEUR in the comparison period, mainly due to the sale of emission allowances, and here too our forecast is below last year (although this item is difficult to predict). Taking into account increased depreciation due to the commissioning of the new saw line in Järvelä as well as low finance costs and taxes, we expect Koskisen's EPS to have decreased at a lever relative to the operating result and to have been EUR 0.09 in Q1. The report is also likely to be disappointing from a cash flow perspective, as the postponement of deliveries due to strikes and the seasonal nature of Q1 are likely to have increased working capital.

We expect Koskisen to repeat its guidance for the current year

Koskisen has issued a guidance for 2024 according to which revenue will grow from last year and the adjusted EBITDA margin will be 8-12%. Last year, Koskisen generated an adjusted EBITDA of 12.2% with a 271 MEUR revenue. We expect the company to reiterate this guidance in the Q1 report. Based on the news flow in the first months of the year and the Q1 reports from peers, low inventory levels and seasonal factors in the Sawn Timber Industry will support volumes and pricing at least in the short term, despite the absence of signs of recovery in the European construction sector. In the Panel Industry, the next turn in demand is likely to be upward, also supported by the logistics sector, and the price outlook is stable to say the least due to the supply disruption. Given this background and the progress of the new saw line in Järvelä during the year, which is expected to be ramped up by the end of the year at the latest, we expect Koskisen's performance to improve towards the end of the year, although high log prices (especially birch) will limit expectations for margin improvement. In Q2, Koskisen's revenue and earnings will benefit from deliveries carried over from Q1. We expect Koskisen's revenue to grow by 8% this year and the adjusted EBITDA margin to be in the middle of the guidance range at 10%.