KH Group Q3'24: Profitability held its own

Translation: Original published in Finnish on 11/4/2024 at 8:15 am EET

The Q3 profitability of KH Group’s largest subsidiaries held their own better than we expected, but NRG’s convincing turnaround took a break due to weak earnings development. Overall, forecast changes were minor in connection with the report. We still see clear hidden value in KH Group’s balance sheet as our sum of the parts calculation indicates a higher value than the current price level. We revise our target price to EUR 0.68 (was EUR 0.65) and reiterate our Accumulate recommendation.

KH-Koneet's and Indoor Group's profitability held their ground better than feared

Despite the challenging business environment, KH-Koneet achieved growth in Q3 and the company’s profitability remained nearly at the level of the comparison period, exceeding our expectations. According to the company, growth focused on machine leasing, but we assume that the company also gained market share in machine trade. Indoor Group’s revenue decreased as expected due to the shrinking market and reduced store network. Indoor Group’s EBIT of 1.8 MEUR weakened from the strong comparison period but developed positively compared to our expectations and the very weak start of the year. Nordic Rescue Group’s quarter was surprisingly weak, as despite the full order backlog and increased organization size, revenue decreased by 26% from the comparison period and the result turned negative. KH Group recorded a 2.6 MEUR item in Q3 related to the sales gain from HTJ. KH Group’s journey toward building an whole around KH-Koneet progressed during the quarter after the HTJ divestment was completed. With the HTJ divestment, the parent company’s balance sheet position strengthened clearly and at the end of the quarter, the parent's net cash was 11.3 MEUR. We do not expect the company to distribute dividends, but to retain the cash to support its subsidiaries.

The guidance cannot withstand a similar performance from Indoor as seen in early 2024

KH Group reiterated its revised guidance for the current Group structure of 340-360 MEUR in revenue and 4-7 MEUR in adjusted EBIT. In connection with the report, our forecast changes were small for KH-Koneet and Indoor Group, but we lowered NRG’s earnings forecasts for the coming years by 10-14% due to weak Q3 figures. Our forecasts for this year based on the current Group structure (note: HTJ included in the official Q1'24 Group level figures) are revenue of 351 MEUR and EBIT of 4.1 MEUR. Our earnings forecast is at the lower limit of the guidance range and we see a risk of a profit warning if the last quarter is a bust for a subsidiary. We expect this year to be the bottom of the cycle and KH Group to achieve significantly stronger earnings in the future. In addition to the strengthening EBIT level, the decrease in interest rates will have a particularly positive impact on KH Group’s net result due to the Group’s significant leverage.

The market no longer gives value to Indoor

Our sum-of-the-parts calculation indicates a value of EUR 0.84 per share for KH Group. We see undeniable value in KH Group's holdings and believe the value exceeds the current price level even without the agonizing Indoor. Realization of Indoor’s balance sheet risk would destroy value and limit the upside in the stock, but the parent is not responsible for Indoor’s debts (the parent has net cash from the HTJ divestment). As a result, Indoor only depresses the value of the entity if capital is poorly allocated to the company or if the difficulties in Indoor clearly takes the management’s attention away from other subsidiaries. In terms of KH-Koneet's value, proof of improved profitability in Sweden is key to the story, and we have seen proof of this already this year.