Componenta Q4'24 preview: Price increase provides opportunity to sell

Translation: Original published in Finnish on 3/5/2025 at 8:20 am EET.

Componenta will publish its financial statements bulletin on Friday. We expect both revenue and profitability to have strengthened from the weak comparison period. Our EBITDA and revenue growth expectations for the coming years, which are based on the growth of the Defence Forces' share of revenue and the recovery in the machine building industry, were lowered as we reviewed our forecasts. In our opinion, the sharp rise in the share price has therefore led to a poor risk/reward ratio. Thus, we reiterate our EUR 2.9 target price and lower our recommendation to Sell (previously Accumulate).

One-offs on revenue and earnings lines in Q4

We expect Componenta's revenue to have increased by 29% to 28 MEUR in Q4, and thus to have decreased by 3.5% to 98 MEUR for the full year. In Q4, we expect that the acquisition of Fortaco will have supported revenue by 3-4 MEUR, while Componenta's order book and order intake, which declined later in the year, will have dampened growth. We estimate that the sluggish order intake reflects the weak tractor market, the postponement of customer orders until 2025 and preparations for the looming strike threat at the end of 2024.

We expect Q4 EBITDA to have settled at 3.8 MEUR, supported by a 2.9 MEUR fair value adjustment of the assets transferred in the Fortaco acquisition. Adjusted for this, we expect EBITDA from the operating business to increase to 0.9 MEUR year-on-year, corresponding to an EBITDA margin of 3%, and operating EBITDA for the full financial year 2024 to decrease to 4 MEUR from the previous year. Following a weak operating performance and significant investments (1.8 MEUR in Q4 for the Fortaco acquisition payment), we estimate that free cash flow will remain negative for the financial year and we expect the net debt relative to operating EBITDA will be elevated at the end of the period.

We expect guidance to signal a significant improvement in performance

In view of our forecasts for a significant improvement in both revenue and profitability, only a guidance for strengthening revenue and profitability would be in line with our expectations. Our revenue growth estimate of just under 20% is based on the acceleration of deliveries for the large order from the Defence Forces, the inorganic support from the Fortaco acquisition and the growth prospects for the Finnish machine building sector, which comprises Componenta's customers. For agricultural machinery, the news flow into 2025 has been weaker than expected, which in turn increases the risk associated with our growth forecast. In terms of profitability, we expect a significant improvement, supported by increased utilization rates in Componenta's production.

We have lowered our revenue growth forecasts for the coming years on a volume-driven basis, but we still expect robust revenue growth (revenue CAGR 13% 2024e-2027e). The lower revenue estimates have been strongly reflected in the earnings line. However, we still expect profitability to level up significantly in the coming years (EBITDA-% 8-9%).

Expected return remains weak at current valuation

Based on the valuation methods we use, the stock is expensive after the price increase and our estimated expected return is well below our required return. The EBITDA multiples based on our forecasts for 2024 and 2025 (8 and 5x) are not favorable given the nature of the EBITDA in the financial year 2024 (2.9 MEUR fair value adjustment), the elevated debt level and the uncertainty related to the profitability improvement. The multiples based on lower earnings lines are expensive (2025e P/E 26x) despite the significant profitability improvement we forecast for 2025. The value of our DCF model is also below the share price.