Translation: Original published in Finnish on 10/28/2024 at 7:00 am EET.

Componenta will publish its Q3 report on Friday, November 1, at 8:00 am EET. Our expectations for Q3 volume and earnings development are rather conservative, which will put some pressure on Q4'24 forecasts if and when Componenta reiterates its earlier guidance for 2024. We find the stock's valuation attractive.  

Some growth factors not yet included in Q3

There is no meaningful consensus forecast for Componenta. We expect Q3 revenue to grow strongly (+24% y/y), but the comparison figure is very low. Although the order book at the beginning of Q3 showed only 4% growth year-on-year, Componenta has indicated that the improvement in revenue and EBITDA for 2024 will be clearly weighted towards H2. This was due to the impact of volume up-scaling for serial production and strong volume growth in the defense industry. Uncertainty in the Q3 revenue forecast t is mainly caused by the negative development of Q3 equipment sales of the engineering companies that have already reported their earnings and assumed to be Componenta’s customers. The 41 MEUR purchase of mortar shells from the Finnish Defense Forces is not yet included in our forecasts, as volume deliveries will not start until 2025. The Q3 figures also do not yet include the impact of the acquisition of Fortaco's Kalajoki mill and Sepänkylä machining and service center, which was finalized on October 1, 2024. 

Among the important production factors, prices for pig iron and scrap in Q3 were roughly the same as a year ago, and electricity prices in Finland were -35% lower than in Q3'23. The key profitability driver is therefore volume, which we believe remained unnecessarily low in Q3 in both Castings and Manufacturing. Our forecast for EBITDA margin (7.7%) is at the same level as in Q2 (7.8%) and well up year-on-year (Q3’23: 2.0%). Our estimate for net financing costs (-0.4 MEUR) is lower than last year, but still pushes earnings per share close to zero.

Q4 results include uncertainty related to Fortaco acquisition

Componenta has guided for an improvement in net sales and EBITDA in 2024 compared to 2023. The Q3 reports of presumed customers (e.g. Cargotec, KONE, Konecranes, Metso, Wärtsilä, Ponsse) gave a mixed picture of the development of manufacturing volumes in Q4'24. AGCO (Valtra) has not yet reported its Q3 figures. Expectations for 2024 market demand for trucks, tractors and forestry equipment, for example, are still negative globally or in Europe, but most of the year is already behind us. Componenta has previously indicated that the 2024 revenue will be supported by the aforementioned ramp-up of volume products and an increase in the company's market share. The consolidation of the acquired businesses of Fortaco from the beginning of Q4'24 is estimated to add 3.8 MEUR to revenue for the rest of the year.

If Componenta's Q3 numbers turn out as we forecast, the company's 2024 guidance would require at least 25% year-on-year revenue growth and an EBITDA of 1.5 MEUR (margin 5.4%) in Q4’24. Our current forecast for Q4'24 is 30% year-on-year revenue growth and an EBITDA margin of 8.3%. However, achieving our forecasts will not be easy and much will depend on the performance of the acquired Fortaco units in the early stages of integration. In any case, we expect the guidance to be repeated. In the Q3 report, we are also interested in comments on the demand situation in the various customer sectors, the start-up of the Fortaco units as part of Componenta and the outlook for the various cost drivers (raw materials, energy, wages). 

Affordable pricing

The valuation multiples of Componenta's shares are low despite the price rally we have seen. Using 2025 figures, the expected total return is now +19% p.a. (price potential +16% and dividend yield +3%), which is well above the 12% ROE requirement. Calculations based on EV/EBIT or P/E ratios suggest a discount of 32-35%, higher than the 20-30% we consider reasonable. The DCF model indicates a 43% upside for the stock, implying that the stock is cheaply priced overall.