Incap Q4'24: Upward trend appears to continue

Translation: Original published in Finnish on 3/3/2025 at 8:42 am EET.

We reiterate our Buy recommendation for Incap and our target price of EUR 13.00. Despite some softness related to the quality of revenue and results for the rest of the year and a sluggish start to 2025, we think Incap's Q4 report met expectations overall, as the company delivered earnings growth guidance for this year in line with our expectations. In our view, the expected return on the stock remains good, driven by earnings growth (2025e: EV/EBIT 9x). A positive option is to further enhance growth through acquisitions.

Year ended with strong earnings growth

Incap’s revenue grew by 40% in Q4 to 59 MEUR, which was slightly below our estimate. The growth was driven by the recovery of the largest customer from destocking, while revenue from other customers decreased by 7% in Q4. The revenue underperformance was largely driven by other customers, which we had expected to perform slightly better in Q4, in line with other quarters in 2024. Incap explained the decline in revenue from other customers with seasonal fluctuations. In Q4, Incap's adjusted EBIT doubled to 8.8 MEUR (adj. EBIT-% excellent 14.8%). The operating result exceeded our forecast but was of course supported by the elimination of an inventory write-off of 0.9 MEUR, so the result was qualitatively slightly below our estimate. Financial expenses were lower than expected, presumably partly for non-cash FX reasons, while taxes were slightly above our estimates. As a result, Incap's Q4 EPS increased to EUR 0.26, well above forecasts. The report was also strong from a cash-flow perspective, as the company was able to push its working capital down to pre-pandemic levels relative to revenue, mainly due to the successful collection of receivables. Incap, which profiles itself as a growth company and pursues acquisitions, does not pay a dividend, which we believe is fully expected and also justified. 

Company gave guidance for earnings growth again this year

Incap gave guidance for the current year that the company's revenue and reported operating profit will be higher than last year. On Incap's scale, "higher" means a change of 0-20%. The company also said that 2025 will start "cautiously" as customers anticipate the impact of changes related to taxes, tariffs, and geopolitical challenges. As a result, Q1 is unlikely to produce strong numbers, despite the upbeat guidance for the full year. Prior to the report, we were forecasting 10% revenue growth and 14% adjusted operating profit growth for Incap, so the guidance was in line with our expectations, especially given the conservatism typically embedded in the company's guidance at the beginning of the year. Following the report, we have made no changes to our forecasts for Incap in the future years. Being highly competitive, Incap should have a good capacity for organic growth, especially in India, and we expect the company to post average adjusted EPS growth of around 11% on a revenue-driven basis (incl. recovery of the largest customer, cross-selling, new customer acquisition and gradual improvement of the economic situation) by 2027. The main risks to our forecasts relate to the continued significant revenue share of the largest customer, global investment demand and competition. Of course, our forecast does not include acquisitions, which, based on the comments in the report, may be on the cards in the near future. After two successful deals, we see acquisitions as a positive option for value creation.

Valuation picture is still attractive

Incap’s adjusted P/E ratios for 2025 and 2026 based on our estimates are 13x and 12x, and the corresponding EV/EBIT ratios are 8x and 7x. This year's multiples are around the median levels of the company's medium-term averages and within our accepted ranges, so the stock is not remarkably cheap in the near term. We continue to find the stock's 12-month expected return, based in particular on earnings growth and a slight valuation upside, very attractive. The DCF value, which is slightly above our target price level, also supports a stronger positive view on the stock.