Harvia CMD: Updated strategy and targets largely in line with our expectations

Translation: Original comment published in Finnish on 5/30/2024 at 7:14 am EEST.

On Wednesday, Harvia held its first Capital Markets Day. The company raised its growth target to an average annual growth rate of 10%, including acquisitions, and kept the adjusted EBIT target of "above 20%" unchanged. Strategically, growth will be sought, as expected, through both through geographical and product portfolio expansion, and also through acquisitions. The targets were largely in line with our expectations and do not call for any forecast changes. 

Growth target increased in economic targets

Harvia updated its financial targets in connection with the CMD. The previous ones had been issued back in 2018, at the time of the IPO. The new targets are for the same three indicators as before and are:

·         compound annual growth rate 10% (was over 5%)

·         adj. EBIT margin above 20% (unchanged)

·         net debt/adj. EBITDA below 2.5x (was 1.5x-2.5x)

As we expected, the company raised its growth target, as it considers growth to be more important for value creation than increasing profitability, which is already at a very good level. The new 10% does, however, include acquisitions. In terms of organic growth, Harvia said it expects the market to grow by more than 5% over the next 5 years and aims to further increase its market share. This suggests that organic growth alone should reach high single digits. Our forecast is for annual growth in the range of 7-9% in 2024-27, which we believe is quite in line with the target, given that there are no acquisitions in our forecast.

Regarding profitability, the company notes that any investments in product development or expansion may affect margins, and any acquired companies are also likely to reduce profitability in the initial phase. However, we believe that Harvia is not looking to grow at the expense of profitability, but rather that growth should continue to slightly improve profitability thanks to operational leverage. We expect the EBIT margin to improve to 23-24% in the next few years. Based on the comments made at the Capital Markets Day, the company could even increase fixed costs slightly more aggressively than we expect in order to generate further growth at current profitability (around 22%).

For the balance sheet target, the company removed the previous floor (1.5x). This has been virtually irrelevant in recent years anyway, given the company's desire to maintain a strong balance sheet in case of acquisitions, and the company is currently well below the current floor (0.6x). Harvia's dividend policy has been to increase the dividend regularly, which was kept unchanged. 

Stronger market and channel focus in strategy

Harvia also updated its three strategic priorities. These are from now on:

·         delivering the full sauna experience

·         winning in strategically important markets

·         leading in key channels

Compared to the past, we believe that this emphasizes the further expansion of the product range into infrared and steam saunas, which have so far remained small at Harvia (on the other hand, the expansion into entire saunas has been successful). In our view, the company has a good chance to grow organically in infrared, while a stronger position in steam would probably require an acquisition. Moreover, instead of the "geographical expansion" previously sought, the aim is now to win key markets; not necessarily new markets per se, but strong growth in key markets, the most important of which is of course the US. In addition to a sharper regional/country focus, the company will focus more strongly on managing different sales channels and needs, e.g. in terms of product range. We believe that the new organization introduced at the turn of the year will support the company's objectives in its strategic decisions.

Overall, we don't see a significant change in strategy from the previous one, but obviously as the company grows and develops, different things will be emphasized. We believe that these strategic choices will continue to support the company's good growth in the future. The role of acquisitions in the company's growth was also underlined. According to the company, it is particularly interested in targets with a revenue of around 20-50 MEUR. The company's strong balance sheet provides a good opportunity for investments of this size.