KH Group: Quality differences are highlighted

Translation: Original published in Finnish on 03/17/2025 at 08:15 am EET

Based on KH Group's preliminary data, Indoor Group's Q4 figures were weaker than we expected, but other businesses performed convincingly despite a challenging business environment. In connection with the report, we have classified Indoor as an asset held for sale, which weighs especially on the Group's revenue estimates. In our sum of the parts calculation, we made a significant cut to Indoor's fair value but raised our view of the fair value of other subsidiaries. We reiterate our Accumulate recommendation and our EUR 0.68 target price.

Indoor is classified as an asset held for sale going forward

On Thursday, KH Group announced that it has initiated the sales process of Indoor Group and will classify the company as an asset held for sale. As a result, Indoor will no longer be consolidated line-by-line into KH Group's figures, making it easier to analyze other businesses and indicating that the Group assumes the subsidiary will be sold within a year. Indoor's target market has in practice contracted continuously since May 2021, which has created poor conditions for achieving an earnings turnaround. From a cyclical point of view, the timing for the sale is far from ideal, but it would clarify KH Group's investment case and alleviate concerns about poor capital allocation.

Preliminary data for continuing operations were flattering

Based on KH Group's preliminary data, revenue from continuing operations (KH-Koneet, NRG and the parent company) is expected to be 61.7 MEUR, which clearly exceeded our 52.6 MEUR estimate. The preliminary data also pointed to a comparable EBIT of 3.4 MEUR for continuing operations, which exceeded our 2.4 MEUR estimate. Based on preliminary data, continuing operations achieved a tremendous 22% revenue growth in Q4, which, especially for KH-Koneet, would be a remarkable performance considering the anemic sentiment in the construction sector. In the Q4 report, we are looking for visibility into any one-off items that may have boosted revenue.

For Indoor Group, Q4 was again challenging, with the furniture market shrinking by about 6% from the previous year. The Q4 revenue of 40.7 MEUR (-15% y/y) and EBIT of -0.5 MEUR indicated by preliminary data fell short of our estimates of 45.2 MEUR and 0.8 MEUR. In our view, the prolongation of Indoor's earnings turnaround is challenging, as it complicates the Group's restructuring by making it more difficult to find an interested buyer and increasing the need for possible additional capitalization.

Excluding Indoor from our revenue estimates weighs on the 2025 figures

In connection with the report, we have updated our Q4 estimate to reflect the preliminary data provided, while slightly raising our estimates for continuing operations for the next few years, but cutting earnings estimates for Indoor. Going forward, our Group estimates incorporate Indoor only in net income, which explains the expected revenue decline in 2025.

Consolidated valuation multiples turn challenging

Our sum-of-the-parts calculation indicates a value of EUR 0.86 per share for KH Group. In our view, the financial risk associated with Indoor Group and the resulting risk of inefficient capital allocation justify a clear discount for the current Group structure relative to that value. Despite this, we see undeniable value in KH Group's holdings and believe the value exceeds the current price level even without the agonizing Indoor. Recording Indoor as an asset held for sale impairs the information value of EV-based valuation multiples, as Indoor's contribution is no longer reflected in revenue or EBIT going forward. This shifts the focus of the valuation more strongly to a subsidiary-specific approach.