This report is a summary translation of the report “Tavoitteiden mukaista arvonluontia lähivuodet” published on 9/24/2024 at 8:07 am EEST.

Harvia is a leading company in its field with clear competitive advantages. This enables good ROIC and value creation, in addition to which the company's capital allocation to acquisitions has been successful. However, the valuation level (e.g. 2025 P/E 25x) is high, so the expected return remains weak. We raise the target price to EUR 37 (was EUR 35) on the back of an increase in the medium-term forecasts and we reiterate the Sell recommendation.

The world’s leading sauna and spa company

Harvia is the world's largest sauna and spa company. The company itself estimates its market share to be around 5%, which means that its share of the relevant product market for Harvia would be around 10%. The company has significantly increased its market share over the past six years (both through acquisitions and organically). Growth has come particularly from North America, which now accounts for 33% of Harvia's revenue (H1'24). After major fluctuations in recent years, the global market is returning to growth, which Harvia expects to exceed 5% per annum in the coming years.

Harvia has clear competitive advantages and low capital requirements that support strong value creation

In our opinion, Harvia has several clear competitive advantages that support the profitable growth and value creation of the company. They relate in particular to the market for wood/electric heaters and their components. These represent about 60% of Harvia’s sales. We believe Harvia's competitive advantages are: 1) vertical integration and own design, 2) economies of scale (in production), 3) strong brand(s), 4) broad and long-term distribution relationships. We feel that the company has been very successful since 2014 in driving the international growth of Harvia and strengthening these competitive advantages. At the same time, we believe that Harvia has also created a competitive advantage in the complete sauna product category in the US. We also believe the company has been successful in creating value by allocating capital to acquisitions, and this year's ThermaSol deal looks promising. The competitive advantages and low capital requirements enable the company an ROIC of above 20% in the coming years.

Targets updated in spring aim to accelerate growth; we expect Harvia to meet targets

Harvia updated its financial targets last spring and now aims to achieve annual sales growth of 10% (including acquisitions) and an operating profit margin of over 20%. We believe that Harvia will achieve these targets, as the ThermaSol acquisition will lead to growth of around 15% p.a. in 2024-25, and in 2026-27 the organic growth rate alone will be close to the targeted 10%. As in recent years, growth will be driven by non-European regions, with growth in the US supported by increased expansion in steam and infrared products. We also expect Harvia to maintain profitability at an above-target level of 22-23%. However, the growth investments are reflected in the margin, which is not scaled up in our forecasts despite the growth. We only made minor adjustments to our forecast (0-1%).

Valuation is high, expected return is weak, even though the company generates good value and cash flow

We believe that Harvia's valuation level (e.g. EV/EBIT 2025 19x, P/E 25x) is high, although we believe that the company's return on capital and its ability to allocate and generate cash flow are excellent and that multiples will therefore moderate in the coming years. We believe that Harvia’s capital allocation will continue to be value-creating, and thus channeling of cash into acquisitions and/or larger dividends will support the investor’s expected return. We also see Harvia as a potential acquisition target, but with the current valuation, we find it quite expensive for the buyer. Overall, however, the expected return at this valuation level remains weak, especially on a 12-month horizon.