HKFoods extensive report: Profit turnaround come true

Translation: Original published in Finnish on 9/4/2025 at 8:06 am EEST.

HKFoods has executed a convincing earnings turnaround in recent years, driven by, among other things, the strengthening of its investment capacity through the divestment of operations outside Finland. Although we estimate that the largest increase in profitability is already behind, we believe the company still has the potential for a moderate increase, which makes the valuation appear relatively inexpensive. If profitability were to rise to the level of the company’s main competitors, there would be considerable upside potential in the stock. On the other hand, the somewhat high indebtedness and historical challenges in profitability raise the stock's risk level relative to the average for the defensive food sector. We reiterate our Accumulate recommendation and a target price of EUR 1.70.

A large Finnish meat and food company

HKFoods is a large meat and food company, currently focusing mainly on Finland, and with several well-known consumer brands. Retail is the company’s most important distribution channel, in addition to which products are sold to the foodservice channel, to industrial customers and export, e.g. to the Far East and Europe. As typical for the industry, HKFoods has a strong integration with local primary production, which supports visibility in the availability and price of raw materials. In addition to its Finnish operations, the company also has a profitable bacon-focused unit in Poland, though its share of the Group as a whole is small. The industry's growth profile is moderate, as red meat consumption is on a moderate decline in the long term. In its strategy, HKFoods seeks growth particularly from poultry, convenience foods, and meal components, which are well growing market segments.

There is still some room for efficiency improvements

HKFoods has been able to grow its adjusted EBIT for 10 consecutive quarters, with the adjusted EBIT margin estimated to rise to 3.2% in 2025 (2020-23 average: 0.9%). The profitability levels of domestic competitors are at just under 5%, and HKFoods itself raised its EBIT margin target to over 5% (previously over 4%) in its August strategy update. We estimate the company still has efficiency potential, supported by, for example, production investments completed during the summer, cost savings, and poultry exports to China. In our view, however, the largest and most straightforward measures affecting profitability have already been implemented and are mostly reflected in the realized results. In addition, the industry’s profitability can occasionally fluctuate due to changes in the operating environment, such as inflation or animal diseases. We forecast the EBIT margin to improve to 3.4-3.5% in 2026-27. In addition, the decrease in financing expenses significantly supports EPS growth, as balance sheet risks ease. Indebtedness is still somewhat high (net debt/EBITDA H1’25: 2.5x) but continues on a moderate downward trend in our forecasts in the coming years.

Earnings development is reflected in the valuation with strong leverage

We see HKFoods as having the potential to be a defensive dividend company, but its value creation is limited due to the industry's moderate growth prospects and capital-intensiveness. The current earnings-based valuation (adj. EV/EBIT 2025e: 10x, P/E: 21x) is not very attractive, but as financial expenses decrease, P/E-based multiples will fall rapidly. Applying a fair P/E multiple of 10x for 2027 (P/E 2027e: 8x at the current share price), the stock would have a rough annual return expectation of 10%. We see our current estimates as relatively low-risk, and in a positive scenario, earnings growth could continue to be stronger than our forecasts, which would have a strong leverage effect on the share price. Profitability rising to the level of competitors would imply even a double-up potential in the stock, although we see this as highly unlikely to materialize, and it would at least require larger industrial investments than at present, which would have a negative impact on cash flow in the short term.