KH Group Q4'24: Divestments are approaching

Translation: Original published in Finnish on 03/24/2025 at 08:15 am EET

KH Group’s Q4 followed a familiar formula: KH-Koneet and NRG performed well, considering the circumstances, but Indoor Group’s situation deteriorated further. In connection with initiating Indoor’s sales process, KH Group wrote down in full Indoor’s equity and capital loans granted to the company. In our view, the value of the Indoor holding with its current earnings is entirely speculative, and we cut the company's value significantly in our sum of the parts. We reiterate our Accumulate recommendation but revise our target price to EUR 0.65 (was EUR 0.68).

Indoor Group's equity was written down fully

With the preliminary data provided, KH Group's Q4 report was already largely known. Despite the weakness of the construction sector, KH-Koneet achieved strong growth driven by an expanded sales network and increased machine rental. NRG's growth was very strong, although it was supported by vehicle deliveries being moved to the past quarter. Indoor Group's revenue, in turn, declined significantly more than the market, and the review period did not yet provide any indication of the benefits of the new ERP system or operating model. The profitability of KH-Koneet and NRG was strong, driven by growth, but Indoor's negative EBIT was a clear disappointment and weakened confidence in the company's competitiveness.

Prior to the earnings release, the group recognized Indoor Group as an asset held for sale and the value of the holding was recognized at fair value based on market soundings made by a financial advisor. The write-down covered Indoor's equity in full, and the earnings call made it clear that the capital loan granted to the company was also written down. Given KH Group's strategy, divesting Indoor is natural, but considering the rapid timetable for the divestment and the company's weak financial condition, the potential sales price is probably weak. From an investment case perspective, the silver lining of divesting the company is that it would prevent inefficient capital allocation to the company, which we have flagged as a risk. After the review period, KH Group granted Indoor another subordinated loan of 1 MEUR, and the company redeemed KH-Koneet's minority holding for 2 MEUR.

A similar year to 2024 is expected for continuing operations

KH Group's guidance for this year is that the revenue and result from continuing operations will be approximately the same as in the comparison period. The guidance does not include Indoor Group, but management said that they will continue to report Indoor figures separately in the future. Regarding NRG's outlook, demand for rescue vehicles is said to have weakened in Finland towards the end of the year due to delays in wellbeing services counties' purchasing decisions. As a result, the visibility provided by the order book has decreased for the business, and the order book has contracted year on year. We expect KH-Koneet to continue growing this year, but NRG's weaker year will overshadow the development. Our updated forecasts are in line with the guidance for continuing operations. For NRG, we lowered our estimates for the next few years due to the communicated more cautious outlook, while for Indoor, we made a significant cut to our earnings estimates for the next few years.

Cutting Indoor's value depressed the sum of the parts

Our sum-of-the-parts calculation indicates a value of EUR 0.80 per share for KH Group. With the full write-down of Indoor's equity, we view the company's value as a speculative option. However, the strong performance and redemption of minorities in KH-Koneet, a key piece of the story, will advance the investment case. For the company's value, evidence of a return to growth in return on capital plays a key role in strengthening the international growth story.