Translation: Original comment published in Finnish on 5/7/2024 at 7:08 am EEST.

Yesterday, Kreate hosted a Capital Markets Day where the company presented its 2024-2027 strategy and financial targets. During the new strategy period, the company will focus on improving profitability and is now aiming for more moderate growth to support the development of profitability. Regarding growth, the company's focus is on the railway business and the Swedish business. The CMD provided new visibility, particularly on Kreate's Swedish business, but did not result in any immediate changes to our forecasts or our view of the company.

Stronger focus on profitability in the strategy period

Kreate's revenue has grown at an average annual rate of 12% over the last 7 years and the company achieved the revenue target of 300 MEUR for the previous strategy period ahead of schedule. However, the company missed its profitability target in the previous strategy period and is now focusing on improving profitability.

Kreate’s financial targets are:

-          EBITA margin above 5% (previously above 5% in the medium term)

-          Revenue growth of 5-10% (previously above 300 MEUR)

-          Below 2.5x net debt/EBITDA (previously below 2x)

-          Dividend payout ratio above 50% (unchanged)

Kreate's profitability is to be improved through a more selective offering and stronger risk management. In terms of future growth, Kreate will focus in particular on its railway business and on growing its business in Sweden. In our view, the more moderate growth rate will free up capital for other uses, but based on management's comments, the use of this capital has not been earmarked. Acquisitions have not been ruled out in the new strategy period, so we see them as one use of the freed-up capital, along with a more generous dividend payout and strengthening the balance sheet.

Sweden to become a new business pillar

Kreate expanded to Sweden in 2022 through an acquisition, and last year the Swedish business generated revenue of 258 MSEK. The revenue target for the Swedish business for this year is 320 MSEK. In Sweden, the company is aiming for significant growth and is targeting a revenue of more than 650 MSEK by the end of the strategy period. The company did not specifically disclose the profitability of the Swedish business. However, according to management's comments, the Swedish business, which operates in the concrete and rock engineering infrastructure market, does not face particularly fierce competition and its profitability is at a good level.

Growth also sought in railway business

Kreate also expanded into the railway business through an acquisition in 2017. Since the expansion, the company has expanded into electric railway and signaling equipment operations in 2022, invested in rolling stock, and significantly increased its pool of experts. The company has invested more than 5 MEUR in rolling stock and has developed special equipment to increase project efficiency, which is not available for rent. According to the company, the efficiency gains from special equipment, combined with the strict regulation of new equipment, act as a barrier to entry in the railway business. In the railway business, customers are willing to pay a premium for minimal line downtime, underlining the importance of competitive equipment.