RT’s economic review does not yet indicate a turn in the market situation of construction product companies

Translation: Original comment published in Finnish on 3/21/2024 at 7:13 am EET

According to the review for 2024-2025 published by the Confederation of Finnish Construction Industries RT yesterday, the outlook for low-rise residential construction in Finland is very subdued, and no quick recovery is expected in industrial and public new construction nor in renovation. In light of RT’s forecasts, the short-term estimates for construction product companies, i.e. LapWall and EcoUp, still involve downward risks despite recent estimate cuts. In the medium and long term, we estimate that the construction crisis opens up opportunities, at least for LapWall, which we have also included in our forecasts.

The Finnish new construction market is important for LapWall and also for EcoUp

Yesterday, RT published its economic review on the outlook for construction in Finland, which is updated in spring and fall. The review is interesting from the perspective of the construction product companies on the Helsinki stock exchange, i.e. LapWall and EcoUp. In practice, LapWall’s revenue is driven by new low-rise residential construction in Finland (wall panels) and industrial and public construction (roof elements and wall panels) and EcoUp’s revenue is largely driven by new low-rise residential construction in Finland, as well as by renovation.

The economic outlook is bleak in low-rise residential construction, which is important to the companies

Of course, the gloomy economic outlook for construction is generally known, as the rise in interest rates that led to the market stalling last year and achieving highish interest rates, reduced availability of financing, and problems with consumer purchasing power and confidence have not so far taken a concrete turn for the better. In its review, RT served up ugly figures for low-rise residential construction for this year and next, even though construction companies do not have a similar significant problem of unsold dwellings as in apartment building construction.

When assessing the forecast, it should also be noted that in the prevailing weak and uncertain economic environment, forecast tolerances are probably high and the predictability weakens as the time lag increases. Nor do we know the historical accuracy of RT's forecasts either. However, a clearer recovery for this year seems to be slipping away, as in light of current information it seems like the ECB will only lower its policy rates in the summer and it takes time for the rate cuts to pass on to the real economy. In addition, Finland’s economic growth outlook is also shadowed by dark clouds.

According to RT’s forecast, construction of 3,700 detached houses and 1,100 terraced houses will start in Finland this year. The forecast for detached house construction starts for this year is at the level of last year's actual figures and some 45% below the 2022 outcome, but this year’s forecast rose by 100 from November. This year, the number of terraced house construction starts is forecasted to be 1,100 (-300 vs. November), which would be 20% lower than last year’s actual figure and 65% below the outcome in 2022. For 2025, RT expects that the number of detached house construction starts will rise by 27% to 4,700 units and that of terraced houses by good 80% to 2,000. With these figures, the actual construction volume of low-rise dwellings realized this year would probably decrease further from last year, as in early 2023 volumes were still partly supported by the relatively good construction start volume of 2022. For the same reason, the recovery of the volume of low-rise residential buildings would also be rather modest if the actual construction start volumes are in line with RT’s forecast in the short term. In the long term, even faster urbanization than expected will support the demand for housing in Finland according to RT.

RT does not predict a fast recovery in renovation either

For non-residential construction (including, e.g., public construction and industry), RT expects a good 1% growth for this year after a drop of over 5% last year. For next year, RT estimates zero growth in this segment, and according to RT, construction statistics do not show concrete signs of the positive expectations associated with industrial investments thanks to the green transition, for example. In renovation, RT forecasts a decrease of 1% for this year and a growth of 1% for next year (renovation 2023 ACT. -4%).

LapWall's and EcoUp's forecasts may still contain downward risks

In light of RT’s forecasts, weak development in key market segments for LapWall and EcoUp will continue and a brisker turnaround, especially in terms of volume, is not expected until 2026. Market demand may remain below the cyclical peak of 2022 also in 2026. Our revenue forecasts expect 8% and 19% growth for LapWall this and next year, while EcoUp’s corresponding forecasts are -8% and 26% (incl. revenue growth in the Technology business, especially in 2025). Compared to RT’s market outlook, our forecasts are quite demanding for the coming years, despite several cuts in the past year. Their realization would probably require clear market share gains, especially for LapWall in particular in low-rise residential construction and faster growth than the market for EcoUp's business driven by renovation. However, for the time being, we do not make any changes to our forecasts for Lapwall or EcoUp. Considering the business logic of construction product companies, changes in revenue forecasts typically have a leverage effect on earnings forecasts.

The crisis can also offer opportunities, at least for Lapwall

According to RT, it is already questionable how many construction companies will remain standing in Finland that banks want and can finance. Bankruptcy or other supply disturbances have already been seen in the wall panel segment that is important to LapWall, whereas in the insulation market, the direct competition faced by EcoUp is driven by more stable and partly international large companies, and the development of the relative competitive position depends on the progress of the green trend (cf. Ekovilla is significantly more expensive than mineral wool, but a more environmentally friendly premium product). The potentially growing challenges faced by construction companies, i.e. customers, pose credit loss risks for LapWall and EcoUp, which both companies managed to dodge last year with flying colors in the big picture. In addition, there should be 'available' market shares in the Finnish wall panel segment to be distributed in a more clearly improving cycle in 2026-2027 at the latest. LapWall also aims to gain this market share with the large factory investment in Pyhäntä (comment) here, and our medium term forecasts for LapWall also contain an assumption of a clearly growing market share in wall panels.