Componenta Q4 on Friday: Waiting for the guidance

Translation: Original comment published in Finnish on 2/28/2024 at 7:17 am EET

Componenta will publish its Q4 report on Friday at 8:00 am EET. Based on the profit warning issued on January 15, the development of revenue in particular was subdued. However, a positive indication was given concerning the demand outlook for 2024 and the guidance is interesting, as we believe the visibility is still rather weak. The valuation of the stock is cheap.

Low volumes depressed revenue and profitability

There is no meaningful consensus forecast for Componenta. In the profit warning issued in January, the company estimated 2023 revenue to be 101-102 MEUR and EBITDA 5.3 MEUR. Our forecasts are, naturally, in line with this. The weak revenue development in Q4 (Inderes forecast -31% y/y) was mainly affected by the ramp-down of customers’ inventories, but their order intake development was also unfavorable, and revenue was depressed by price indexing. Componenta has indexed material and energy costs to its supply prices and we estimate that the declining price development has cut Q4’s revenue by as much as -7% a y/y. Componenta’s sales prices react to material and energy prices with a delay of one quarter and in Q3’23 the market prices for pig iron and scrap were -15…-37% y/y and the market price for electricity (NP) was down by as much as -80% y/y.

Low volumes and under-utilization of factory capacity weighed heavily on Q4’s result and EBITDA fell to red (our margin forecast is -2.6%). Repeated ramp-ups and ramp-downs of capacity devoured efficiency and caused quality costs. In addition, Componenta drove some new, relatively high-volume products to production in Q4 and this resulted in ramp-up costs. The above-mentioned burdens were directed on both Castings' and Manufacturing's businesses. Our forecast for net financial expenses is the usual EUR -0.5 MEUR and we expect taxes to remain virtually at zero. We believe Componenta will still refrain from distributing dividends.

Componenta aims to grow faster than the market in 2024

In connection with the profit warning, Componenta stated that 'recently, our customers have started to indicate a more positive development for the full-year 2024, and together with the increase in Componenta’s market shares, we currently expect a clear increase in production volumes in 2024 compared to 2023'. The statement was surprisingly positive considering Componenta’s customer groups, among which the most important are mechanical engineering (43% of revenue in Q3’22-Q2’23), agricultural machinery manufacturing (33%), forest machine manufacturing (7%) and energy industry (8%). For many engineering companies, we predict a slight decrease in equipment revenue in 2024. On the other hand, the following factors give credibility to Componenta’s comments: 1) the company estimates that its market share among customers has increased; 2) the company’s new sales have apparently been successful, as suggested by the talk of new product ramp-ups; 3) Componenta speaks specifically about the increase in production volumes and not revenue; and 4) Componenta’s revenue is generated early compared to customers’ revenue. Our overall revenue growth forecast for the company in 2024 is still +6 % y/y. Our 2024 EBITDA forecast (marg. 8.0%) is also unchanged and is supported by volume growth. In our opinion, Componenta's guidance should be revenue of at least 105-110 MEUR and clearly improving EBITDA to provide support for the share price.

We find the stock valuation low

The expected total return of Componenta's stock is well above the required return with EV/EBITDA-based calculation for 2024. On the other hand, calculations based on EV/EBIT or P/E ratios give an unnecessarily negative picture of the potential return, as these ratios are currently subject to significant leverage. This is due to Componenta’s temporarily disproportionately low EBIT and EPS ratios compared to EBITDA. Despite these factors, we find the risk-adjusted return attractive. Relative valuation multiples are biased by the same factors as those mentioned above. Therefore, the 2024 EV/EBITDA ratio is clearly discounted by -56% to the median of the peers, but the EV/EBIT is at a premium (+11%) and the P/E ratio even more clearly (+76%). We also find the EV/EBITDA to be a more meaningful benchmark in the current situation than other multiples in peer group valuation, and based on it the over-proportional valuation discount of Componenta’s share is obvious.