Kempower: News flow does not support expectations for stronger sales

This report is a summary translation of the report “Uutisvirta ei tue odotuksia myynnin vahvistumisesta” published on 9/3/2024 at 7:25 am EEST.

The change of sales director and the sluggish market increase uncertainty about the expected order growth for the rest of the year. The electrification of transportation is currently in an intermediate phase, from which it could return to a growth path if, for example, electric cars become cheaper, and interest rates continue to fall. In the short term, however, we see risks of further declining sales and increased price competition due to overcapacity in the industry. We lower our recommendation to Reduce (was Accumulate) and the target price to EUR 10 (was EUR 16).

Significant rebound in H2 less likely than before

We have expected and continue to expect Kempower's order intake to improve in H2 compared to the sharp decline in H1 (-33% y/y). However, in light of the recent news flow, we think the probability of a stronger growth turnaround is lower than before. In our view, the departure of Kempower's sales director, announced on the morning of September 2, will increase uncertainty about the near-term sales outlook. We also estimate that the orders announced during Q3 have been moderate in size. Sales of electric vehicles remained sluggish over the summer (January-July sales in Europe flat year-on-year), which is unlikely to encourage charging operators to accelerate investments in the short term. However, we are unlikely to see another sharp decline in orders as in H1, also due to easier comparison figures. In addition, an increase in the number of new Kempower customers in H1 and a slow unwinding of inventory levels by long-term customers could support sales. We now expect H2 order intake to decline 3% year-on-year (previously 9% growth).

Market is taking a gap year or two in terms of growth

On an annual basis, we have lowered our revenue forecasts by 5-8% between 2024 and 2026 for the reasons outlined above. We cut our EBIT forecasts by 17% for 2026. We forecast revenue growth of 30% p.a. in 2025-26. Kempower itself estimates that the DC charger market in Europe and North America will grow by an average of 33% per year between 2023-30. Due to the early stage of development of the market, growth is uneven. We believe that the electrification of motoring is currently in a slower phase before electric cars are introduced on a larger scale by Western car manufacturers in the lower price segment. Competition in the DC charger market has intensified. Kempower is not the only manufacturer that has had a difficult year, but we also see competitors that have continued to grow. A decline in interest rates and the development of the supply of EVs in the coming years could reverse the direction of the market towards significant growth.

Long-term growth prospects harder to rely on for valuation when visibility on competitiveness weakens

Assessing the long-term investment story is very challenging in the current market and competitive environment. Kempower's margins are among the best in the market, which should support its competitive position as price competition intensifies. On the other hand, the company is losing in scale to at least some of its strong competitors, which in part limits cost competitiveness. With our current forecasts for 2026-27, EV/EBIT multiples fall to 18x and 13x, respectively, which could be considered attractive levels in a fast-growing market with better visibility. However, the disruption of the favorable market share trend and ongoing sales challenges threaten the company's aspirational position among the industry majors, adding uncertainty to our long-term forecasts of good margins and global growth. We do not forecast a profit warning in 2024, but the possibility cannot be ruled out. In particular, further evidence of market share growth would be required to strengthen the investment story.