Norrhydro extensive report: NorrDigi out of the starting blocks

Translation: Original published in Finnish on 10/17/2024 at 8:15 pm EEST.

The long-term demand prospects for Norrhydro's hydraulic cylinder business are good, and the outlook for NorrDigi products is very promising. The technical risks of the NorrDigi products are already very low and the commercial launch has started under the impetus of Volvo CE. The start-up has been delayed compared to our previous estimates, which has led to a significant reduction in our earnings forecasts for 2025-2026. However, the stock's justified long-term upside is very substantial, which is why we maintain our Accumulate recommendation. Our target price remains unchanged at EUR 2.10, as our forecast changes are only a one-year shift, while Norrhydro's risk profile has been lowered.  

NorrDigi's customer base is expanding nicely

Volvo CE has been pleased with the results of extensive testing of the NorrDigi MCC multi-chamber cylinder and has already started the commercial launch of the technology. Norrhydro has also announced new customer wins for NorrDigi MCC, including a US drilling rig operator and a global material handling equipment manufacturer, which we believe to be Kalmar. These three customers alone will keep Norrhydro's NorrDigi team busy in the coming years, and we expect NorrDigi revenue to reach 10 MEUR in 2027. 

We continue to forecast strong growth despite a one-year shift

Our revenue forecasts for Norrhydro for 2024-2027 still include three components: 1) hydraulic cylinder sales from existing customers (growth of around +3% p.a.); 2) hydraulic cylinder sales to new customers already in the preliminary stages or in various stages of negotiation (contribution to Group growth of around 3-4 percentage points); and 3) NorrDigi sales (contribution to Group growth of 6 percentage points). Overall, we expect Norrhydro's 2027 revenue to reach 48 MEUR and 2024-2027 growth to be +12% p.a. However, following the postponement of the commercial launch of NorrDigi compared to our previous estimates, our revenue forecast for 2025-2027 has been reduced by 9-16%, which corresponds to a shift of about one year.         

Rapid earnings growth if volume uptick materializes

The growth of the NorrDigi business, which will still be loss-making at EBITDA level in 2024-2026, and the increase in the revenue share from zero to 22% in 2027, as well as the positive profitability through volumes, will significantly increase Norrhydro's profitability. The EBITDA margin of the conventional cylinder business will also increase thanks to the efficiency measures taken and the operating leverage. We expect the Group's EBITDA margin to increase from 6.0% in 2024 to 12.4% in 2027. As a result of this shift, our margin projections for 2025-2026 have been reduced by 2.5-2.9 percentage points, but only by 0.4 percentage points for 2027. 

Long-term upside potential is significant

The suitability of both the peer pricing and total revenue model for Norrhydro is still weak due to the company's early stage of development. In the SOTP calculation, the value per share is EUR 2.3-2.9, with the average of the figures indicating an upside of just under 50%. The DCF model points out to even greater potential (+60-70%). However, a lot of positive news flow and good earnings performance is still needed to realize the full potential of the share price, especially with regard to NorrDigi. Therefore, our target price reflects a situation where less than 40% of the upside between the current price and the fair value has been realized.