Kreate Q3'24: Year of improving results

Translation: Original published in Finnish on 10/28/2024 at 6:00 am EET.

We lower our recommendation for Kreate to Reduce (was Accumulate) and revise the target price to EUR 8.80 (was EUR 9.00). The Q3 result was good and strengthened our confidence in Kreate's profitability improvement. However, the outlook for infrastructure construction has deteriorated in the short term and we expect the recovery next year to be rather H2-oriented. This outlook has led us to slightly lower our forecasts for the next few years, which also prompted us to revise our target price downwards. The market will eventually start to recover, but in the short term, we believe the drivers for significant price increases are limited.

Good result for Q3

In Q3, Kreate's revenue decreased by 12% to approximately 78 MEUR, slightly exceeding our forecast of 76 MEUR. In line with our expectations, the revenue decline slowed down compared to the first half of the year as projects started to ramp up and comparison periods started to become easier. The order book was still 31% down at 153 MEUR, but several railway projects received are still to be included in the order book for the execution phase (total project value around 300-400 MEUR). Despite the markedly lower revenue, Kreate's EBITA of 3.1 MEUR was above the comparison period (Q3’23: 2.9 MEUR), in line with our predictions. The EBITA margin rose up to 4.0% from the comparison period (Q3’23: 3.3%). Profitability improved for the fourth quarter in a row as old fixed-price projects are no longer a burden.

Guidance unchanged, with some short-term weakening in outlook

Kreate's guidance remained unchanged, with revenue expected to decrease to 270-300 MEUR in 2024 (2023:
320 MEUR). EBITA is expected to grow to 8-11 MEUR (2023: 7.8 MEUR). In terms of EBITA, we see Kreate meeting the guidance, but there is a guidance risk in terms of revenue. However, we would not be concerned about a possible revenue shift between quarters. We forecast revenue to decline by 14% to 276 MEUR this year, but EBITA to increase to 9.2 MEUR (EBITA-%: 3.3%), especially following the completion of old projects in 2023, which have been burdening profitability. In 2025, we expect growth to pick up gradually (25e: +2.3%) towards the end of the year thanks to the recovery of the Finnish market and the strong growth orientation in Sweden. However, stronger growth is now postponed to 2026 (26e: 5.3%). We expect easing cost pressures, an increase in the Swedish contribution (better profitability) and higher volumes in 2025-2026 to bring profitability closer to Kreate's normalized level of 4% (25-26e: EBITA-%: 3.8%). Continued weakness in the construction market, delays in infrastructure investment and persistently high costs of construction pose risks to the development, but at the same time the market can recover quickly in infra and have a significant positive impact on both revenue and the result in the coming years.

Not much upside in valuation and expected return dependent on dividends

We forecast an increase in Kreate's earnings in 2024, but the stock is starting to be valued at a challenging level relative to that (2024e: EV/EBIT: 11x, P/E: 17x). We forecast a slight increase in Kreate's result in 2025, bringing the valuation down to a now reasonably neutral level (25e: EV/EBIT: 10x, P/E: 13x). Compared to our acceptable valuation (EV/EBIT, P/E: 10-12), the stock would have no upside potential. However, the stock is supported by a strong dividend yield of around 6%. We believe that Kreate has the capacity to pay a dividend based on its financial situation and the will to increase it year after year. The DCF calculation stands above the share price (EUR 10.2) and slightly supports the stock at current levels.