Translation: Original published in Finnish on 1/13/2025 at 7:00 am EET.

We lower Kreate's target price to EUR 8.00 (was EUR 8.80) but raise our recommendation to Accumulate (was Reduce). In 2024, we expect Kreate to have successfully improved margins, and in 2025, revenue growth will drive earnings growth. However, the short-term market outlook is weak (H1'25) and we have slightly lowered our forecasts. However, after the share price decline, we believe the earnings outlook is attractive given the improving market and earnings levels of Kreate in the coming years. 

Full-year margin improvement confirmed in final quarter

In 2024, Kreate was able to reverse the trend of its earnings in the right direction, i.e., upwards. For the full year, we expect Kreate's EBITA margin to improve to 3.2% from 2.4% in the same period last year and EBITA to reach 8.7 MEUR (2023: 7.8 MEUR). However, due to a weaker market and a lower order book (large projects completed), we expect revenue in FY2024 to decrease by 14% to 276 MEUR. Kreate expects revenue in the range of 270-300 MEUR and EBITA in the range of 8-11 MEUR. In other words, our estimate is at the bottom of the range.

For Q4, we expect a decline in revenue (-6%) and a slight improvement in the EBITA margin (3.6% vs. 3.4% in Q4’23). We have slightly lowered our earnings forecasts ahead of the financial statements on February 5, 2024, as we estimate that market activity continued to be weak in Q4 and that profitability may have been slightly impacted by the cost of repairing the Kirjalansalmi bridge. However, the impact of tail effects from old cost-intensive projects in the comparison period should now contribute to the improvement in the last quarter of 2024.

Growth and profitability improvement expected for the guidance

For 2025, we expect revenue to increase by 4% to 287 MEUR and adjusted EBITA to increase to 10.2 MEUR (EBITA %: 3.6%). Revenue growth will be driven by the rail projects to be added to the order book in the spring, which should significantly boost top line growth in the second half of the year. However, the beginning of the year will still be challenging in terms of volumes. Profitability will be positively impacted by increasing volumes and easing cost pressures. In line with our forecasts, Kreate should guide for at least a modestly increasing revenue and improving earnings. We also see a stronger order book in 2025 and a recovering market driving the company to profit growth in the following years (2026-2027). There is a risk that project development phases will be extended, projects will be postponed or that the weak market outlook will continue beyond H1'25 into the fall.

Moderate upside in valuation

The valuation of Kreate is high for 2024 due to the low earnings level but becomes much more attractive in 2025-2026 (25-26e: EV/EBIT: 9x, P/E: 11x), when the earnings level also starts to normalize (EBITA %): 4%). Compared to our acceptable valuation (EV/EBIT: 10-12x, P/E: 10-12x), the stock would have an upside of 5%. The dividend is expected to increase by one cent to 49 cents in 2024, resulting in a strong dividend yield of 7%. Based on debt maturities and cash position, Kreate has the ability to pay a dividend and aims to increase it each year. However, we do not give the dividend much weight in our valuation, and we do not believe a cut would be a significant disappointment given the potential for growth investments. The DCF calculation, which better reflects the long-term potential, is also well above the current price (EUR 10.3), which supports our recommendation.