KH Group: A leap forward in unlocking value

The purchase price for HTJ seems good and will offset KH Group's balance sheet concerns. The announced M&A transaction contributes to the investment story of building a comprehensive business around KH-Kone and allows for more reliance on KH-Kone in the valuation. This, together with reduced balance sheet concerns, should, in our view, rebalance the risk/reward of the stock back to positive. We raise our target price to EUR 0.72 (was EUR 0.65) and raise our recommendation to Accumulate (was Reduce).

Agreed transaction price seems good after a weak Q1

KH Group announced on Friday that it has agreed to sell the construction consulting company HTJ to XPartners Finland. The debt-free purchase price of the sale was 23 MEUR, which exceeded our enterprise value estimate of
22 MEUR. KH Group expects its share of the purchase price to be 13.2 MEUR after net debt and transaction costs. At the agreed price, HTJ's EV/EBIT ratio is 8.8x in 2023 figures and 11.9x in our current year forecast. We believe the transaction price is attractive given the sluggish M&A market, HTJ's weak Q1 profitability and increased competition in the smaller projects that are key for the company.

HTJ out of forecasts as of mid-September

In connection with the news, KH Group updated its guidance and now expects pro forma revenue of 370-390 MEUR and adjusted EBIT of 9-13 MEUR for the current year. The updated guidance does not include HTJ anymore. However, the forecast range dropped more than our forecasts for HTJ, so the guidance declined slightly compared to our expectations. KH Group expects the HTJ transaction to close in September. We believe the deal is very likely to go through, so we have factored it into our forecasts and removed HTJ from our forecasts as of mid-September. For the other subsidiaries, our forecasts are unchanged, although we have included the 2023 balance sheets for each subsidiary in our subsidiary-specific forecasts after their financial statements have become available. We had previously expected an earnings warning from the group, but with the guidance revised down more than our HTJ forecasts, our forecasts are now at the lower end of the updated guidance range. The guidance still assumes a significant earnings improvement from Q1 levels and a profit contribution from the Indoor Group, which has underperformed in recent years, and as a result we continue to see the risk of a possible earnings warning. In the update, we have taken into account the 2.9 MEUR put option exercised by the minority shareholders of KH-Kone, which brings the parent's ownership in KH-Kone to 95.1%.

The company has optionality again, but capital needs to be allocated wisely

Our sum-of-the-parts calculation indicates a value of EUR 0.88 per share for KH Group. The values per subsidiary in our sum-of-the-parts calculation are: KH Koneet 46 MEUR, Indoor 24 MEUR and NRG 3.5 MEUR. Our valuation justifies the current price level in practice without the turnaround company Indoor, which we see as a viable approach as the value of the HTJ is realized and the balance sheet risk diminishes. However, the current ownership structure exposes investors to the risk of prolonging Indoor's challenges and poor capital allocation, where Indoor's leveraged balance sheet would also infect the parent through excess leverage. This risk is mitigated by the parent's limited 58% stake in Indoor, which means that the KH Group is not fully burdened with supporting the company. We currently view Indoor as an option with a positive expected value, but unfortunately it is not risk-free.