Suominen Q1'25: Improved earnings sought through new savings

Translation: Original published in Finnish on 5/8/2025 at 8:37 am EEST.

Suominen's Q1 result weakened year-on-year as the market situation was challenging. Despite the new savings program, we believe the company's situation remains difficult and the valuation of the share is high. We reiterate our Sell recommendation and lower our target price to EUR 1.8 (was EUR 1.9) on the back of downgraded estimates. 

Q1 weakened year-on-year, yet above our expectations

Suominen's revenue increased by 3% year-on-year. The growth was mainly supported by improved selling prices and sales mix. Volumes, on the other hand, decreased slightly. Geographically, growth came mainly from the Americas segment, with EMEA revenue being close to the comparison period. The adjusted EBITDA decreased slightly from the comparison period (4.5 MEUR) to 4.1 MEUR, which was affected by the increase in fixed costs and a small negative currency impact. However, the result was slightly better than our expectations (3.8 MEUR). However, the company's result is at a weak level, with adjusted EBIT still in loss, and the direction of the result is naturally wrong as it weakens.

The balance sheet situation is becoming worrying

Due to the weak result and ongoing investments, Suominen's cash flow was negative in Q1, as it was for the full year 2024. The company's net debt/adj. EBITDA was about 4x at the end of Q1'25, which in our view is already worryingly high, especially as earnings development has also been negative in recent quarters. This is underscored by the fact that the company has major investments underway, which we believe will keep cash flow negative this year. In our view, the weak balance sheet may cause pressure to reduce working capital, for example, at the expense of margin. The company has not disclosed the covenant levels of its loans. Suominen's loans mature in the summer of 2026 and 2027, so the company does not have an acute need for refinancing, but the renewal of the entire financing will become topical next year at the latest.

10 MEUR savings program to support profit improvement

As expected, Suominen reiterated its full-year guidance for a year-on-year improvement in adjusted EBITDA (2024: 17.0 MEUR). We note that Suominen has failed to significantly improve its earnings level in recent years. The earnings improvement is supported by the 10 MEUR savings program announced by the company in connection with its results. The effects of the program should materialize over the next 24 months. So, the full impact will take a relatively long time to materialize, and we expect some of the savings to be offset by normal cost inflation.

In recent years, Suominen has continuously improved its operations by, e.g., closing one plant and with a smaller efficiency program last year. However, these effects have not been significantly reflected in the company's earnings. Therefore, the new savings program is clearly necessary and significant in scale, but its impact on earnings is very uncertain. We believe that the launch of the savings program, on the other hand, indicates that the company's earnings outlook would remain very weak without it. We also point out that our forecasts already include a significant earnings improvement within a couple of years, which would require such measures to be achieved. Due to the persistently weak earnings level and outlook, we have again clearly lowered our estimates.

The stock is pricing in a significant earnings improvement; we believe the expected return remains weak

The company's earnings multiples for the next few years are high and not in the range of our acceptable multiples only years from now, so we see many years of expected earnings growth going into the digestion of the multiples. Considering the limited competitive advantages, we do not believe that Suominen is able to achieve a return on capital that is sustainably above the required return in the long term. Assuming a much better margin in the longer term, our DCF model yields a value of EUR 1.8, in line with our target price.