Harvia Q3'24: Efficiency at work

Translation: Original published in Finnish on 11/8/2024 at 8:27 am EET.

Harvia's Q3 result was slightly better than our expectations with a positive margin surprise. The company's growth prospects remain good both in the short and medium term. However, this is also reflected in the somewhat high valuation (e.g., 2025 P/E 26x). We raised our medium-term margin estimates and the target price to EUR 40 (previous EUR 37). We reiterate our Sell recommendation. 

Strong material margin drove Q3 result above our estimate

Harvia’s Q3 revenue increased by 14% and organically by 8%. As expected, the regions outside Europe continued to show strong growth, while revenue in Northern Europe continued to decline, pushing the group's revenue development slightly (2%) below our forecast. The company improved its adj. EBIT margin by almost 3 percentage points in Q3, reaching the level of H1, with Q3 typically being the seasonally weakest in terms of margin. This was supported by a material margin that rose to almost 70% (vs. Q3’23 61% and H1’24 just under 65%). The company commented that this was supported by both geographical and product group-specific sales distribution. We believe the former is a continuing trend, while the latter may be at least partly quarterly fluctuation. On the other hand, fixed costs were also significantly higher than expected, limiting a greater improvement in the EBIT margin.

Growth outlook remains good and profitability potential looks increasingly promising

Harvia does not provide short-term guidance, but based on management's comments, the outlook remains good, especially in its strongly growing markets outside Europe. The exception may be Northern Europe, where revenue, which has been declining this year, will not turn to growth in Q4, at least according to our forecasts.  We did not make any significant changes to this year's forecasts, but we believe that the very strong material margin implied by Harvia supports the company's medium-term margin potential, as we expect fixed cost growth to slow down below revenue growth at some point.

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 well within the target level of 22-24%.

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 20x, P/E 26x) is high, although we believe that the company's return on capital employed 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.