HKFoods Q3'25: Turnaround continues and financial position stabilizes

Translation: Original published in Finnish on 11/05/2025 at 07:23pm EET

The largely unsurprising Q3 results led to moderate positive estimate changes, mainly due to a decrease in financial expenses. We expect the operational earnings turnaround to continue, albeit at a more moderate pace than before, which, together with the gradual normalization of financial expenses, will rapidly decrease valuation multiples. We reiterate our Accumulate recommendation and raise our target price to EUR 1.80 (was EUR 1.70).

Operational earnings slightly better than expected

Q3 was largely in line with expectations. Revenue decreased 2% (we expected 3% growth), which was impacted by the continued and partly deliberate decline in low-margin industrial sales and exports. In addition, exports to China suffered from tariffs on pork, although the company estimates that the situation may recover in the longer term. Retail and foodservice sales grew, which had a favorable impact on the gross margin (+0.7 pp y/y). Adjusted EBIT of 11.8 MEUR grew slightly (+0.2 MEUR y/y) and exceeded our estimate by 4%. High-margin segments supported earnings growth along with efficiency improvements, but rising beef prices impacted margins negatively. Reported EBIT was weighed down by 0.8 MEUR in non-recurring items related to the assessment of the Polish unit's future and other minor write-downs. Adjusted net income was clearly higher than estimates due to lower-than-expected financial expenses and taxes. Cash flow also developed more favorably than we expected.

Earnings are growing, but operationally slower than before

HKFoods reiterated its guidance that expects comparable EBIT to increase from 2024 (27.7 MEUR). Our estimate for 2025 is 33.3 MEUR, assuming stable earnings development in Q4 relative to a strong comparison period. The 2026-27 estimates remained operationally unchanged, but the decrease in net financial expense estimates slightly supported the earnings outlook (EPS rose 7% for 2026e and 2% for 2027e). Retail demand is on an upward trend as consumer purchasing power improves, but on the other hand, the foodservice market has, at least for now, suffered from weak restaurant sales. The beef sales margin is likely to improve after the summer quarters, as the company has passed on increased costs to prices during the fall pricing period. There is also a possibility for earnings improvement in exports with the support of China's poultry exports, and on the other hand, if the export of pork parts to China recovers again. The oversupply of pork in Europe may create additional competitive pressure, although no clear concrete signs of this have yet been observed in Finland. Investments in ready meal production and ready-to-eat products completed between May and September partly support growth in channels with good margin levels. We therefore expect the company to continue earnings growth in the coming years – albeit at a slower pace than the strong momentum of recent years. The decrease in financial expenses will significantly support net income due to the refinancing of the hybrid loan in Q3 and the estimated refinancing of the bond at the end of 2026.

Favorable earnings development provides sufficient return potential

We see HKFoods as having the potential to be a defensive dividend company, but its value creation is limited due to the industry's moderate growth prospects and capital-intensiveness. HKFoods' earnings-based valuation (adj. EV/EBIT 2025e: 9.6x, P/E: 14x) is not particularly attractive, but as financial expenses decline, P/E-based multiples will decrease rapidly. With a fair P/E ratio of 10x applied to 2027, the stock's expected annual return would be roughly 12%. We see our current estimates as relatively low-risk, and in a positive scenario, earnings growth could continue to be stronger than our forecasts, which would have a significant leverage effect on the share price. Profitability rising to the level of competitors would imply even a 70% upside, although we see this as highly unlikely to materialize, and it would at least require larger industrial investments than at present, which would impact cash flow negatively in the short term.