Incap Q1'25: Tensions already rising towards the end of the year

Translation: Original published in Finnish on 4/27/2025 at 11:05 pm EEST.

We lower our target price for Incap to EUR 12.00 (was EUR 13.00) and our recommendation to Accumulate (previous Buy). Incap's start to the year was slower than expected, which already raises questions about the achievement of guidance given the uncertainty around the prevailing operating environment, although the company was confident about H2. In light of our lowered estimates, the company's earnings growth will be limited this year, but thanks to the upside of the low EV-based valuation and the positive M&A option, we believe the expected return is sufficient even on a 12-month horizon.

Earnings level slightly below the comparison period

Incap’s revenue decreased 2% in Q1 to 52 MEUR which was quite clearly below our estimate. The company had already warned at the time of the financial statements that the beginning of the year would be subdued as customers put their orders on hold due to trade and geopolitical uncertainties, and this materialized more strongly than we had expected, especially in Europe. In Q1, Incap's adjusted EBIT decreased by 5% to 5.5 MEUR (adj. EBIT-%: 11.0%). The operating result was also below our forecasts, as revenue was below our forecasts and personnel expenses exceeded them. Based on the latter factor, the company seems to have been prepared for slightly faster revenue growth, as the gross margin was good, so the product mix must have been somewhat normal.   Financial expenses were higher than expected, presumably partly for non-cash FX reasons, while taxes were slightly above our estimates. As a result, Incap's Q1 EPS increased to EUR 0.14, well below forecasts. The report was also sluggish in cash flow terms, with a significant working capital commitment in Q1. This is partly due to seasonal factors, but the clear increase in inventory relative to the situation at the end of Q4 may of course indicate that the company is already prepared for an improving demand in Q2.

Earnings growth guidance remained unchanged

Incap reiterated its guidance for the current year that the company's revenue and reported operating profit will be higher than last year. On Incap's scale, "higher" means a change of 0-20%. However, Incap was confident that the market would improve towards the end of the year, which of course is partly based on demand forecasts from customers. Given the prevailing trade policy situation and its inherently negative spillover effects on the macroeconomy and the company's investment-driven demand, we believe there are clear risks to this assumption. Furthermore, given the slight lag in Q1 and the fact that the comparison figures will become more challenging as the year progresses, we do not believe that the guidance is certain to be met in terms of the result. We lowered our estimates for this year and the coming years by 7-10% on a revenue-driven basis, in particular for macro reasons. Our earnings forecast for the current year is just at the lower end of the guidance range, and in practice we expect the company to make horizontal progress this year in a sluggish market. In the coming years, we expect the company to achieve earnings growth of just over 10%, driven by a gradually improving market, the recovery of its largest customer and cross-selling. The company should have adequate spare capacity for growth, especially in India, according to our estimates. The main risks to our forecasts relate to the continued significant revenue share of the largest customer, global investment demand and competition. Of course, our estimates do not include acquisitions, which remain high on the company's agenda. After two successful deals, we see acquisitions as a positive option for value creation.

Valuation picture is still attractive

Incap’s adjusted P/E ratios for 2025 and 2026 based on our estimates are 13x and 11x, and the corresponding EV/EBIT ratios are 8x and 7x. This year's multiples are around the level of the company's medium-term low medians, and we see moderate upside in them. The medium-term earnings outlook is supported by good earnings growth potential. The DCF around our target price supports a positive view on the stock, although we have raised our required return due to macro reasons and the risk of earnings warnings associated with the current year.