HKFoods Q3'24 preview: Preliminary information indicates good performance

Translation: Original published in Finnish on 10/31/2024 at 7:00 am EET

HKFoods will announce its Q3 interim results on Wednesday, November 6 at around 8.30 am EET. The company’s positive earnings revision issued in September bodes well for earnings development. We suspect that high-margin growth and efficiency improvements are key factors behind the strong Q3. The warm summer and a favorable cost environment have also contributed to the result.

We expect that Q3 growth came with good margins

We estimate that HKFoods' Q3 revenue will reach 259 MEUR, representing an increase of 12% in continuing operations from the comparison period. This growth is supported by external revenue growth in the Polish bacon business as a result of the divestments (estimated growth impact of 6 percentage points), which, we believe is accounting technical growth by nature rather than organic growth. We expect that the remaining predicted 6% organic growth is generated by barbecue demand supported by commercial success and favorable weather conditions. We estimate that sales distribution improved relative to Q2, when exports were over-represented in revenue. Poultry and processed foods are key growing segments within the product range. We believe the demand for red meat value cuts has remained challenging due to, e.g., the weak market development in the restaurant segment.

Commercial successes, efficiency measures and operating environment support the result

We expect HKFoods' adjusted EBIT to be 9.1 MEUR (3.5% of revenue) in Q3, which would be an improvement over the comparison period (6.6 MEUR, 2.9% of revenue). In 2023-24, the company has implemented savings measures and efficiency investments that have led to improved profitability. The automation investments in the poultry factory completed in H1 and Forssa’s packaging investments begin to support the result from Q3. We also find the cost environment favorable for the profitability of the food industry when the upward cost pressure eases. For Q3, we estimate net financial expenses of 3.4 MEUR, a result from associated companies of 0.5 MEUR, and taxes of -1.6 MEUR, so the net profit before minority interest and interest on the hybrid loan would be 4.7 MEUR. We expect the minority interest of the profit to be 0.5 MEUR and the interest rates on the hybrid loan approximately 1.0 MEUR, so the net profit attributable to shareholders would be 3.1 MEUR.

The market is turning its eyes to 2025

HKFoods’ result has developed strongly during 2024, as the company raised its guidance on the comparable EBIT of continuing operations to 22-25 MEUR on 26 September (we forecast 23.2 MEUR). The previous guidance stated that the result would improve from 2023 (adj. EBIT: 11.6 MEUR). We estimate that a large part of the earnings improvement is related to internal efficiency improvements and some to improved operating environment conditions, such as easing inflation. The outlook for the rest of the year is good. In October, HKFoods received approval from the authorities to sell its Danish businesses, so the company is about to complete the restructuring process, which will result in the business focusing mainly on Finland.

The aim is to continue the earnings improvement during 2025, which could be supported, e.g., by the completion of the new mature products factory in Eura in early 2025 and other efficiency improvements following the major restructuring carried out by the company. However, determining the sustainable earnings level for coming years involves uncertainty as, e.g., China has threatened the EU with pork import restrictions, which could have a significant negative earnings impact on HKFoods and the industry as a whole. We also suspect that the warm weather conditions in the 2024 summer season were more favorable than usual. We forecast a fairly stable performance for 2025 (adj. EBIT: 23.5 MEUR).