GRK Q2'25: Strong perfomance continued

ranslation: Original published in Finnish on 08/01/2025 at 08:35 am EEST

GRK's Q2 EBIT almost quadrupled year-on-year and significantly exceeded our estimates. The Q2 beat, positive market comments, and our previous assessment of the order book likely converting to revenue somewhat faster also raised our earnings forecasts for 2025-2026. However, the clear rise in the share price has neutralized the valuation, so the expected return based on the dividend yield no longer appears sufficiently attractive. We downgrade GRK's recommendation to Reduce (was Accumulate), but raised our target price to EUR 14.00 (was 13.00) with the raised estimates.

Strong growth continued in Q2

GRK's revenue grew faster than we expected to 232 MEUR (+27%), and profitability also developed favorably, with an adjusted EBIT margin of 7.1%. Earnings were supported especially by a high revenue level, but projects have also proceeded without major issues. Operating cash flow, on the other hand, turned negative, but this was not a significant surprise due to the high advance payments in Q1 and the seasonality of the business. According to our calculations, GRK received new orders worth approximately 148 MEUR in Q2 (-54% y/y), which was a reasonable amount and roughly in line with our expectations. However, the order backlog decreased by 9% year-on-year, which was expected due to Q2's strong invoicing and the comparison period's significant additional orders (incl. Stegra).

Our earnings estimates for the next few years increased

GRK reiterated its raised guidance as fully expected, following the earnings revision in June. However, with strong H1 performance and a rather reasonable order backlog, even the new guidance does not appear particularly demanding. We made no changes to our H2 forecasts, but the Q2 overshoot drove our 2025 forecasts upwards. We now expect GRK's adjusted EBIT to be slightly above this year's guidance range, so another positive earnings revision towards the end of the year would not be a surprise. After the Q2 report, we raised our revenue and earnings forecasts for 2026. This was driven by positive demand comments and a slightly accelerated estimate of the order book conversion rate for next year. From 2027 onwards, our revenue and earnings forecasts remained almost unchanged, even though we added the small acquisitions recently announced by the company to our forecasts.

In terms of revenue, we expect 2025 to remain GRK's peak level, at least without new acquisitions, as it will likely be challenging to quickly compensate for the dip in Swedish revenue caused by the large Stegra project that will slow down and eventually end next year. In Finland, we expect at least market-level development, whereas in Estonia, significant railway projects are driving more rapid growth than this. Overall, the demand outlook for infrastructure construction seems quite positive in all of GRK's operating countries. In our forecasts, the Group's earnings will also decline in 2026-2027, after which the company should return to a growth path. In our estimates, the decline in earnings is also influenced by the profitability margin normalizing slightly from excellent levels. In 2028, we expect the company to slightly exceed its revenue target of over 750 MEUR and achieve the targeted adjusted EBIT margin of over 6%.

Share price rally turned the expected return insufficient

Based on our GRK estimates, the P/E ratio for 2025 is 13x, while the EV/EBIT multiple, accounting for the oversized cash position, is approximately 8x. We expect dividend yields for the next few years to be around 4-5%. Thus, valuation does not look stretched with this year's multiples, but at the company's normal earnings level, which our 2026-2027 forecasts better reflect, the stock is already priced firmly within our accepted range (2026-2027e EV/EBIT 10-11x and accepted range 9-12x). The valuation cannot, therefore, be considered unreasonably high, but with the stock being reasonably priced, the expected return largely consists of a 4-5% dividend yield. This turns the risk/reward ratio insufficient after a strong price rally.