HKFoods: Grill in danger of overheating

Translation: Original published in Finnish on 6/10/2025 at 7:45 pm EEST.

In our view, the strong share price increase over the past month has turned the stock's risk/reward ratio weak. We expect HKFoods’ profitability turnaround to continue, but after the most straightforward efficiency measures, earnings growth will be slower and more capital-intensive. The current share price prices in a return on invested capital of about 10% - a rather good level in the industry context. We lower our recommendation to Reduce (was Accumulate) with a target price of EUR 1.50 (was EUR 1.30).

Profitability has turned around and redeeming the hybrid bond will soon be possible

HKFoods has executed a convincing turnaround in profitability in recent years, after suffering from a low and fluctuating earnings level for more than a decade. The turnaround is attributable to the company's focus on the Finnish market, which has also strengthened its investment capacity. Efficiency-improving targeted investments, a stable cost environment and commercial successes have boosted recent earnings growth. The company's balance sheet has also strengthened, and there is a prospect of redeeming the hybrid. In our view, the hybrid could be redeemed in September 2026, unless the sale of the small Polish bacon business is completed by September 2025. Redemption, however, requires the improved earnings level to be sustainable.

Continuing earnings growth will gradually become more difficult

The adjusted EBIT margin already rose to 2.8% during 2024, and we expect the margin to improve further to 3.1-3.2% in 2025-2026. The company's key competitors, such as Atria Finland and Snellman, achieved an EBIT margin of 4.7% in 2024, so in comparison, our current profitability forecasts are not yet particularly demanding. On the other hand, when looking at HKFoods’ return on capital, the ROI 2025-2026e: 8.5-9.2% is already in our view typical for the industry and is difficult to significantly improve (Atria 2025-26e: 9.8%). After implementing the obvious initial efficiency measures, achieving earnings growth will gradually become more challenging and capital-intensive.

Current share price reflects a good ROI by sector standards, and we believe the upside has been eaten

A change in the profitability margin has a significant impact on the fair value of HKFoods' share, assuming other things remain equal. We have examined the fair share price as a function of the EBIT margin using valuation multiples from our estimated fair range of EV/EBIT 8-10x. With a multiple of 9x, the current share price (EUR 1.78) would correspond to an EBIT margin of 3.7%. This is somewhat above our current forecasts and would correspond to a return on investment (ROI) of around 10%, which can already be considered a fairly good level in the food industry. We do not think it is justified to price in an ROI of over 10% in the share price. Stabilizing ROI at the level of the average return requirement (WACC: 8.6%) would already be a good achievement, considering the company's historical operational challenges.

In connection with the update, we made small positive changes to our estimates (EBIT 2025-2026e increased by 3%) and lowered WACC (was 8.7%) as the company's earnings turnaround lowered the risk level of the share. If the company manages to continue its turnaround in profitability significantly stronger than our estimates, the share price could continue to rise. The balance sheet’s strong debt leverage amplifies price reactions in both directions.