KONE Q3'24: The ball and chain from China is getting lighter

Translation: Original published in Finnish on 10/27/2024 at 9:50 pm EET.

KONE's Q3 numbers were below forecasts except for order intake, with China as the main contributor. KONE tweaked its 2024 guidance downward due to China and referred to the recent Capital Markets Day for the 2025 outlook. Our forecast changes are minimal. KONE's share has slipped -5% since we downgraded our recommendation, and the valuation is attractive again. We raise our recommendation back to Accumulate (was Reduce). We set our target price to EUR 55.00 (was EUR 52.00), which would partially eliminate the currently unjustified discount relative to the nearest peers.    

China nothing but a burden in Q3

KONE’s Q3 order intake (+4 % y/y) exceeded both our (±0% y/y) and the consensus estimate (+1 % y/y). Orders in New Building Solutions (NBS) were slightly down, but growth in Service was over 10% y/y and particularly fast in Modernization (+20% y/y). In China, we estimate that orders fell by more than 20% year-on-year. Q3 revenue (±0% y/y) was disappointing, with NBS revenue down 11% year-on-year. In contrast, both Service and Modernization revenue grew by 9...10% year-on-year. Regionally, revenue in China was down by 20% year-on-year, but the rest of the regions grew at a pace of 7...12% year-on-year. The Q3 EBIT margin (11.6%) was a slight disappointment. Margins were supported by the sales mix, but profitability was negatively impacted by the margin decline in China, broad-based cost inflation and increased bad debt provisions (20 MEUR). However, excluding this provision, the Q3 EBIT margin would have been 12.3%, in line with our forecast.

Minor estimate changes

KONE maintained its view on its target markets for 2024. Nevertheless, the Chinese market is becoming increasingly challenging, which led to a slight reduction in the full-year 2024 revenue guidance (growth of 0...3% y/y vs. 0...4% previously) and adjusted EBIT margin guidance (11.5...11.9% vs. 11.5...12.2% previously). For 2025, KONE referred to the indications given at the recent CMD and the new financial targets for 2025-2027. The company's target for this period is revenue growth of around +5% year-on-year and a comparable EBIT margin of 13…14% in 2027. KONE expects both the Service and Modernization markets to grow in 2025 and has previously estimated that the Chinese market for New Building Solutions will continue to shrink in 2025. KONE also expects to see the first results of the efficiency program presented at the CMD in 2025, with components such as better pricing, more efficient use of best practices throughout the supply chain and savings in procurement. Together, these are expected to improve the group EBIT margin by 1.5 percentage points, with the upward trend expected to accelerate towards the end of the period. Our forecasts for 2024 have been lowered by the Q3 figures and the new guidance. However, the changes to our projections for 2025-2026 are small.   

Valuation starting to get attractive again

The expected total return of KONE's share in 2025 at P/E, EV/EBITDA and EV/EBIT ratios is consistently +8...+9% p.a., slightly above our 7% p.a. required return. Based on this, the risk-adjusted expected return for the share is attractive again. The 2025 EV/EBIT and EV/EBITDA are both -5% below the peer median and well below those of the main competitors Otis and Schindler (-15...-19%). Overall, peer valuation of the share is favorable. Our DCF model indicates a +11% upside for the share.