This report is a summary translation of the report “Täyttä höyryä kasvuun” published on 8/8/2024 at 11:00 pm EEST.

Harvia grew by more than 20% in Q2 and, supported by the recent acquisition, the growth outlook continues to look good, especially in North America. The margin remained at a strong level, while the company also invested in future growth. We have raised our forecasts for both the next few years and the medium term, especially the growth prospects. We raise our target price to EUR 35 (was EUR 32), but maintain our Sell recommendation as the valuation remains high. 

Very strong growth in Q2, margin stable at a good level

In Q2, Harvia's revenue grew by more than 20%, well above the forecasts of just over 10%. In Europe, the growth was only slight and was explained by deliveries postponed from Q1 due to the strike. Outside Europe, however, growth was phenomenal, with North America growing by more than 40% and APAC & MEA by almost 80%. While there may be some quarterly fluctuations in the numbers (in this case upward), even for H1 as a whole, North America grew by over 30% and APAC & MEA by almost 50%. Such rapid growth naturally translates into market share gains, although there is no accurate or up-to-date information on market developments. The strong growth in these regions pushed the company's H1 growth to a level of 10%. Harvia's adj. EBIT grew roughly in line with revenue by just under 20%, exceeding our expectations of slightly less than 10%, and the margin was, as expected, around 22%, as in the comparison period. The company has made significant investments, e.g. by increasing staff to support future growth, which actually led to a slight decline in the margin despite the strong growth. However, the margin is at an excellent level and in line with the company's objectives. In fact, it was made clear at the Capital Markets Day in the spring that the company's goal is to maximize growth with current profitability, not to push for the highest possible profitability. We believe this is the right choice in terms of value creation.

In coming years, we expect progress to be in line with targets

Harvia's financial targets, updated in the spring, are earnings growth of 10% (average, including acquisitions) and an adjusted EBIT margin of more than 20%. The company has met its targets in H1'24 and we expect it to continue to do so in the coming years. We believe the recent ThermaSol acquisition will take growth well above 10% and we expect organic growth to be close to 10% in the coming years. As for profitability, we expect the current level of 22-23% adjusted EBIT margin to remain practically unchanged. In this report, we have raised our revenue forecasts for the next few years by 3-4% and our earnings forecasts by 2-3%.

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

We find Harvia's valuation level (e.g. EV/EBIT 2024 + 20x, P/E 25x) high, although we consider the company's return on capital and its ability to allocate and generate cash flow excellent. In 2024-26, we expect Harvia to achieve annual organic EBIT growth of around 10%, accelerated by the recent acquisition. In addition, the investor receives a dividend yield of 2%. The company’s current strong cash flow provides a cash-flow rate of some 4%. 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. In the medium term, we believe that (organic) earnings growth will be limited to a good 5% growth in revenue. Overall, however, the expected return at this valuation level remains weak, especially on a 12-month horizon.