Translation: Original published in Finnish on 10/24/2025 at 7:25 am EET.

Norrhydro's clearly stronger growth and profitability development in Q3 than our forecasts led to significant estimate upgrades for the coming years. This supports the strengthening of the balance sheet in addition to the earnings-based valuation. The valuation, taking into account NorrDigi's growth investments, already looks quite attractive, although it must be noted that estimating the long-term return on NorrDigi's investments is very difficult. We raise our recommendation to Accumulate (was Reduce) and our target price to EUR 1.60 per share (was EUR 1.40).

Q3 was clearly stronger than our expectations

Norrhydro Group announced figures on business development for January-September on Thursday morning. We interpret the release as a reaction to the strong development in the third quarter, which differed from our expectations and, in our interpretation, also more broadly from the market's expectations for the company's earnings development. The company's revenue grew by 36% in Q3, which significantly exceeds our previously forecast growth for the entire second half of the year (H2: 17%). In addition, Q3 EBIT and EBITDA saw year-on-year improvements of 0.54 MEUR and 0.52 MEUR, respectively. Our previous forecast was that the EBIT for the entire H2 would improve by a total of 0.56 MEUR. The company has therefore improved its Q3 result by almost as much as we expected for the entire H2. The Q3 material margin was 50.1%, while our H2 forecast was 48.4%. We have not previously forecast quarterly figures for the company, as it typically reports semi-annually.

We expect continued growth, albeit more moderate than in Q3

In our view, the strong Q3 performance was driven by favorable demand from manufacturers of mining and material handling equipment, among others. In forest machines, on the other hand, where Ponsse is a significant customer for Norrhydro, we believe that development has been more subdued and may weaken further in Q4, as the customer in question reported a 9% decrease in new orders in Q3. We significantly raised Norrhydro's revenue growth forecast for the current year and now estimate H2 growth at 26%. This would mean growth slowing to 20% in Q4, due to, among other things, the demand challenges of the aforementioned customer. Q3 is seasonally a slightly smaller quarter for Norrhydro and the comparison period was weak, so we believe it is unlikely that Q3's strong relative growth rate will continue for longer. Overall, the volume growth we are now forecasting will have a significantly positive impact on Norrhydro's earnings performance (2025e EBITDA increased by 15% and EBIT by as much as 33%). We forecast growth to continue at a relatively slower pace of 9% in 2026, partly due to the challenging outlook for the forest machine market. Growth will mainly come from conventional cylinders (7%), but our forecast also includes some growth from NorrDigi technologies that have become or are becoming commercially viable.

Valuation and balance sheet outlook more attractive than before

A faster-than-expected recovery in demand and an improvement in the earnings level significantly reduce the share's earnings-based valuation and improve the company's balance sheet position. Net debt at the end of Q3 was 0.5 MEUR lower than a year ago. In our forecasts, debt will decrease even more clearly by 1 MEUR in 2026 as the earnings level continues to improve. The current year's earnings-based valuation EV/EBIT 18x is still high, but with 2026 forecasts, the multiple is already quite reasonable at 11x. In Norrhydro's case, it is also worth noting NorrDigi's growth investments, which have an estimated negative impact of 1 MEUR on operating profit. Adjusted for this, the EV/EBIT would be only 11x for 2025e and 8x for 2026e, which could be considered favorable, assuming that the investments generate profitable growth in the long term. With a NorrDigi-adjusted EV/EBIT multiple of 10x, the stock would have an upside of up to 40% – although we do not want to rely fully on this valuation method due to NorrDigi's weak predictability. Both earnings-based valuation and DCF are highly sensitive to assumptions about volume growth, which increases the stock's risk level.