KONE: Coming years rely on the aftermarket

This report is a summary translation of the report “Lähivuodet jälkimarkkinan varassa” published on 9/30/2024 at 8:45 am EEST.

The opportunities offered by digital services and modernization were the two spearheads of KONE's Capital Markets Day and will underpin growth and profitability in the coming years. Our forecast changes are minimal. The stock's valuation has risen to demanding levels again, and there are no significant upside drivers in sight. We reduce our recommendation to the Reduce level (see below) and set the target price at EUR 52.00, which would bring the expected total return close to the required return. 

Few stock price drivers presented at CMD

At KONE's Capital Markets Day on September 27, the company presented its new strategy, the most interesting parts of which are the use of digital services to drive growth and earnings improvement, and the opportunities in the growing modernization market. In the area of digital services, KONE aims to bring its entire fleet of serviced elevators online. The share is now around 35%, of which 20 percentage points are already connected to 24/7 services. In digital services, KONE achieved a 10-percentage point higher conversion rate for digital services and a 5-percentage point higher service contract retention rate. This also has the effect of increasing margins, as a trained maintenance worker can be 30% more productive maintaining 24/7 elevators than other elevators. There is a huge opportunity for modernization as 10 million of the world's nearly 25 million elevators are over 15 years old and only 0.3 million lifts are currently being modernized each year. KONE is targeting >10% growth in modernization, and its modernization margin is "not far from the group average" (11% by 2023). Modernizations accounted for 18% of KONE's revenue in Q3'23-Q2'24, with growth of +11% year-on-year.   

No specific pressures to change forecasts

KONE had announced its financial targets up to 2027 a little earlier. These were revenue growth of around +5% year-on-year and a comparable EBIT margin of 13-14% in 2027. Growth and earnings improvement will be based on maintenance and modernization, as KONE expects the new equipment market in China to continue to decline in 2025. In contrast, the maintenance market is expected to grow by almost 10% per year and the modernization market by more than 10%. KONE's targeted margin improvement is based on a change in the revenue mix towards more service and modernization-oriented products, as well as more efficient procurement, sales and marketing, and support functions. Our forecast changes remain moderate. Due to KONE's pessimism on China, we have lowered our revenue forecasts for 2025-2026 by -2 to -3%. However, we believe that KONE is well positioned to make progress towards our 2027 targets, and having raised our estimates for both service and especially modernization profitability, our 2025 EBIT margin expectation is now 12.8% (previously 12.4%) and our 2026 forecast is 13.2% (12.7%).    

Valuation is again on the tight side

The expected total return of KONE’s share is slightly positive with 2025 P/E and EV/EBIT ratios at 4-5% which is below our 7% required return. Based on this, the risk-adjusted expected return for the share isn't currently attractive. The 2025 EV/EBIT and EV/EBITDA are around 5% above the peer median and on either side of the multiples of the main competitors Otis and Schindler. Overall, peer valuation of KONE’s share is on the full side. Our DCF model indicates only +2% upside for KONE.