KH Group Q1 on Tuesday: Seeking visibility for stepping stones out of the earnings slump

Translation: Original comment published in Finnish on 5/5/2024 at 10:52 pm EEST.

KH Group will publish its Q1 report on Tuesday at 8.00 am EEST. The report will be a weak one, as the company said in its earnings warning last Tuesday that Q1 figures are expected to be significantly below pro forma numbers for the comparison period. In particular, Indoor Group and KH-Kone are expected to report weak results as guidance has been lowered following their weaker-than-expected performance. Q1 missed the mark for numbers, so we are looking to the report for visibility on the sustainability of the nature of the factors that burdened the early part of the year. 

Major holdings in weak shape in Q1

We expect KH-Koneet's revenue to decline by 18% to 33.2 MEUR, driven by the weakening momentum in the construction sector. We expect the challenges to be particularly concentrated in equipment sales, which have been directly impacted by rising interest rates, while we expect equipment rental and maintenance to hold up better. We expect the challenges faced by the Indoor Group in recent years to continue, with revenue declining by 7% to 40.5 MEUR, due to a shrinking market and the exit from Estonia in Q4. We estimate that Indoor's ERP project, which is nearing completion, has caused inefficiencies during the quarter. In Finland, the furniture market contracted by 9% year-on-year in January and we expect the market to remain weak throughout the quarter. Our estimates see HTJ's revenue increasing by 3% to 6.3 MEUR, supported by the acquisition of Finest Con. We expect that the weakness in the construction sector will gradually be reflected more strongly in the demand environment for HTJ. We expect NRG's pro forma revenue (note: does not include Vema Lift) to be flat at 10 MEUR. NRG's order book is strong and, in our view, the biggest constraint on the company's growth this year will be its own supply capacity.

Weak Q1 profitability

We forecast KH-Koneet's adjusted pro forma EBIT to decline steeply to 0.3 MEUR as a result of weaker sales and reduced pricing power due to increased competition. For the Indoor Group, we expect an EBIT of 2.1 MEUR, but this figure includes a gain of 3.7 MEUR from the sale of the real estate in Estonia, and adjusted for this, profitability will be significantly lower than in the comparison period. Indoor's profitability is still far from its potential due to, among other things, a continuously shrinking target market since summer 2021, costs related to the exit from Estonia and the ongoing ERP project. Given Indoor's leveraged balance sheet, a positive development in profitability would be particularly welcome to reduce balance sheet risk. Despite the revenue growth, we forecast HTJ's adjusted EBIT to remain flat at 0.4 MEUR, as the sluggish demand environment weighs on billing rates and pricing power. NRG is facing a weak comparison period and we expect the company to deliver significant earnings growth supported by a strong order book, but the impact of the company at the group level will be small.

Guidance downgraded just before the result

KH Group lowered its guidance last Tuesday and now expects an EBIT of 12-16 MEUR (previously 14-16 MEUR). However, in contrast to the previous guidance, the updated one takes into account the 3.7 MEUR impact of Indoor Group's real estate sale in Estonia, resulting in a comparable 25% reduction of the midpoint of the guidance. Our net sales forecast for the current year is slightly below the guidance at 393 MEUR, while our operating profit forecast is 13.3 MEUR. Our revenue forecast for the current year is slightly below guidance at 393 MEUR, while our EBIT forecast is 13.3 MEUR. We expect Indoor Group and NRG to deliver earnings growth this year.