Meriaura Group Q2'24: Stable outlook, expensive earnings-based valuation

This report is a summary translation of the report “Vakaat näkymät, kallis tulospohjainen arvostus” published on 8/23/2024 at 8:00 am EEST.

Meriaura Group's Q2 results were in line with expectations. The performance of Renewable Energy has improved, but breaking even would require several years of strong growth, which we believe is uncertain. Demand prospects in the near term are stable. However, we believe that the risk/reward profile of the stock remains weak, which is why we reiterate our Reduce recommendation and lower our target price to EUR 0.03 (was EUR 0.04). Our target price is given to two decimal places, which explains the large relative change.

Profit up as expected in Q2

In Q2, Meriaura Group's revenue increased by a whopping 45% year-on-year to 22.1 MEUR, exceeding our forecast by 12%. Growth was achieved in both businesses, and both also landed ahead of our forecasts. In Marine Logistics, revenue was supported by a shift in demand from the first quarter due to the impact of the port strikes in Finland, but also by otherwise strong demand and order book. In Renewable Energy, revenue increased thanks to a large solar thermal project in Bad Rappenau and the acquisition of Rasol, a supplier of solar photovoltaic solutions, in late 2023. Operating profit lines were broadly in line with our forecasts. EBITDA improved to 2.3 MEUR (Q2’23: 1.1 MEUR) and EBIT to 0.8 MEUR (Q2’23: -0.2 MEUR). Financing costs were slightly higher than forecast, resulting in a net result of 0.3 MEUR, slightly below our forecast (0.5 MEUR), but significantly up year-on-year (Q2'23): -0.5 MEUR). Cash flow from operating activities was negative in H1, partly due to the commitment of working capital, and investments increased significantly due to ship orders.

No significant changes in the outlook

Meriaura Group does not provide numerical guidance, but the company notes that it expects demand for both Marine Logistics and Renewable Energy to remain stable. We raised our 2024-26 revenue forecasts by 2-3% due to better-than-expected top-line growth in Q2 but lowered our net income forecasts due to higher financing costs and slightly lower-than-expected EBIT. In the coming years, we expect earnings growth to be driven primarily by improved performance in the Renewable Energy segment, which will require a steady and growing order flow, especially for solar thermal projects. The Renewable Energy order book amounted to 10.1 MEUR at the end of June (+10%), providing good growth visibility for the rest of the year. However, the high growth of 33-36% projected for 2025-26 will require significant new orders to materialize.

Renewable Energy turnaround still a long way off

Meriaura Group's equity story is increasingly linked to the potential earnings turnaround in Renewable Energy. The first steps of the turnaround have been taken, but sustaining strong growth over several years will be challenging, which is why we see significant uncertainty surrounding the turnaround. The growth of Renewable Energy and the turnaround in earnings may require further balance sheet strengthening measures in the coming years, such as share issues or further sales of shares in Marine Logistics to the group's major shareholder. Our sum-of-the-parts valuation method now shows a value of EUR 0.034 per share, of which Marine Logistics forms the majority for the time being. The large vessel investments in the coming years will contribute to cash flow pressure in the coming years, although they offer growth and differentiation potential in the long term. Progress in the Renewable Energy turnaround and faster-than-expected growth would be potential drivers that could turn the stock's risk/reward ratio in a better direction.