HKFoods Q4'24: Balance sheet risks prevail, even if result improves

Translation: Original published in Finnish on 2/17/2025 at 07:58 am EET

HKFoods’ result has improved clearly due to efficiency investments and focusing on Finland. We expect earnings growth to moderate in the coming years. The timing of the redemption of the hybrid bond remained unclear, with the Board proposing a substantial return of capital to shareholders. We do not find the risk/reward ratio particularly attractive compared to other companies in the sector, although earnings growth continuing stronger than we estimate could change the situation. Therefore, we reiterate our Reduce recommendation and our  EUR 1.0 target price.

The turnaround progressed strongly, as reported in January

HKFoods’ revenue increased by 7% in Q4 year and adjusted EBIT (10.3 MEUR) improved significantly (Q4’23: 3.0 MEUR). A significant portion of the revenue growth stemmed from an accounting change in the Danish bacon business, as sales to Sweden and Denmark are now recognized as external revenue following recent divestments. We estimate that organic growth accounted for 2-3% and it stemmed from favorable sales development in high-margin sales channels on a broad spectrum. According to the company, the Christmas season went well and HKFoodsgained market shares in the foodservice segment. The strong earnings development was already known after the company released preliminary data on January 15, 2025. Reported EBIT (6.5 MEUR) was depressed by write-downs and one-off items related to the termination of employment contracts in Finland. Taxes were also clearly higher than our forecasts, so the EPS of continuing operations was clearly below our forecast of EUR -0.06 (EUR 0.03). Net debt at the end of the year decreased to some 150 MEUR and corresponds to 2.7x EBITDA in 2024 (our net debt forecast was 141 MEUR).

The company expects an upward trend in earnings

HKFoods' guidance is that adj. EBIT will grow in 2025 from 2024. Earnings growth is supported by, e.g., the full impact of the implemented efficiency measures (mainly affecting H1) and the commencement of Chinese poultry exports. We raised EBIT forecasts by 4-6% for 2025-26, but we assume that EBIT growth will be moderate, affected by, e.g., higher wage inflation than usual and risks related to consumer demand.

Capital return to shareholders increases uncertainty about the timing of the hybrid loan redemption

The company's Board of Directors proposes a capital return to shareholders of EUR 0.09 per share for 2024 and a discretionary mandate for the Board to decide later onan additional capital return of EUR 0.05. Management did not have a clear view on whether the company can redeem its expensive (interest rate 16% p.a.) 26 MEUR hybrid loan in September 2025. If our forecasts materialize without non-recurring items or cash flow surprises, the redemption of the hybrid in September 2025 would raise the net debt/EBITDA ratio to 3.2, which we believe could prevent the redemption. There is significant uncertainty related to the balance sheet development and the financiers' approval for the measure, so we assume in our forecasts that the redemption will still only take place in 2026.

We do not find the risk/reward ratio attractive

In our view, the current valuation of the share (EV/EBIT 9.5x) is slightly above the fair value (9x) when compared to the industry valuation level and company-specific risks. Even with the proposed minimum capital return, the "dividend yield" would be approximately 11% on a one-year horizon, which raises the total return expectation to approximately 5%. We see an elevated risk level still connected to the balance sheet and the sustainability of the turnaround. In our view, there are equally cheap and less risky investment targets among Finnish food sector stocks. On the other hand, if HKFoods’ earnings level were to clearly improve on a sustained basis, the value of the stock would increase significantly due to the company's high debt leverage.