Kempower Q3'24: No clear signals of a growth turnaround yet

Translation: Original published in Finnish on 10/31/2024 at 8:20 am EET.

The Q3 report did not yet show the desired improvement in order intake. The negative impact of high customer stock levels on demand looks set to continue until early 2025. We still expect growth to turn positive in 2025, but there is considerable uncertainty about the timing of the turnaround. We reiterate our Reduce recommendation and lower our target price to EUR 9.5 (previously EUR 10.0).

Weak order intake postpones growth turnaround

The key figure in the Q3 report, order intake, was 51.5 MEUR (-15% y/y), 11% below our and consensus forecasts. In addition, Kempower reported that customer stock levels remain high and will continue to negatively impact demand until the first half of 2025. Revenue was 52.3 MEUR (-15% y/y, 15% below our forecast) and operative EBIT was -7.9 MEUR (forecast -5.9 MEUR). The gross profit margin (51.3%) was higher than at the beginning of the year and stronger than forecast, suggesting that no significant price erosion has yet occurred, at least in terms of actual revenue. The operating result was negatively impacted by a 5 MEUR increase in warranty provisions during Q3. Kempower's net cash decreased to 15 MEUR at the end of Q3 (Q2’24: 30 MEUR, 2023: 75 MEUR) due to the loss-making result and the increased working capital. The company's liquidity remains at a good level (101 MEUR), including 53 MEUR of cash equivalents and 48 MEUR of undrawn credit facilities. Revenue guidance for 2024 was lowered to 220-230 MEUR (previously 220-260), and we predict Kempower to reach the lower end of the guidance range, as Q4 revenue is likely to be the highest of the year, among others due to production of the new generation product platform reaching full speed.

We expect demand to pick up in 2025

We continue to expect Kempower's revenue to turn to growth in 2025, supported by, e.g., new customer wins and, on the other hand, declining stock levels of old customers. In addition, we expect sales of electric vehicles to turn to more significant growth, for example due to stricter EU emission limits, which, together with falling interest rates, should have a positive impact on charging operators' investments. However, we lowered our 2025-26 revenue estimates by 5-7% and our 2026 EBIT estimate by 7%. The trend towards electrification of heavy-duty transportation is progressing, but we do not expect it to have a major impact on growth prospects in the near term.

Share priced close to fair value relative to our current projections

Assessing the long-term investment story is very challenging due to the fast-moving market and competition. Kempower's margins are among the best in the market, which provides a strong starting point if the price-driven competition intensifies. On the other hand, the company is for the time being losing in scale to at least some of its strong competitors, which partially limits cost competitiveness. Our current estimate of an acceptable EV/EBIT valuation level of 15x does not provide upside over the required return on equity, based on our projections of reasonable profitability in 2027 (EBIT: 46 MEUR). We estimate that Kempower's market share growth has stalled in the turbulent market of 2024. If market shares were to turn downward, the company's aspirational position among the industry majors could be threatened, adding uncertainty to our long-term forecasts of good margins and global growth. We see a small risk of a profit warning in 2024, although we consider it unlikely. Strengthening the investment story would primarily require further evidence of market share growth, but signals of market recovery could also reduce uncertainty about the near-term earnings trajectory.