Koskisen Q2'24: Impending turnaround is appropriately priced into the stock

This report is a summary translation of the report “Lähestyvää tuloskäännettä on sopivasti hinnassa” published on 8/19/2024 at 7:25 am EEST.

We reiterate our Reduce recommendation for Koskisen and revise our target price to EUR 7.50 (previously EUR 7.00). Overall, Koskisen's Q2 report was broadly in line with our expectations and we made only marginal changes to our near-term forecasts after the report, apart from the lowered depreciation forecasts. However, we still think that the stock is fairly correctly priced on a one-year horizon. As a result, we believe Koskisen's expected return is in line with the required return, so we still continue to seek a more stable attractive buying opportunity for the stock.

Weaker performance but in line with expectations

In a seasonally good Q2, Koskisen's revenue of 78 MEUR generated an adjusted EBITDA of 9.3 MEUR. As expected, operating result was significantly lower than in the strong comparison period, but our and consensus forecasts were well in line with the Q2 figures. The Panel Industry was still responsible for earnings, driven by the good margins of birch plywood, although the unit's result dropped significantly year-on-year. The Panel Industry figures were better than we had forecasted driven by volume. In the Sawn Timber Industry, profitability remained at the modest level of the comparison period and was disappointing, as the high price level for softwood logs and the somewhat slower-than-expected ramp-up of the Järvelä investment increased the cost structure. We commented on the result here on Friday.

We kept our operating forecasts almost unchanged, but lower lines benefited from declining depreciation forecasts

Koskisen reiterated its 2024 guidance according to which revenue will grow from last year (2023: 271 MEUR revenue) and the adjusted EBITDA margin will be 8-12%. This reaffirmation of the broad guidance was to be expected. Market commentary was largely in line with peers. In the Sawn Timber Industry, the delayed recovery in construction and still higher log prices indicate that the challengin times will continue well into the next year, which should of course be offset by the progress of the new line in Järvelä and the gradual realization of the efficiency benefits of the investment. In the backbone of the Panel Industry, the birch plywood segment, demand is good and market dynamics are tight due to the supply constraint caused by Russia's military aggression and the new EU measures restricting the circulation of sanctions, making it possible to generate a good result despite the high price level of birch logs. Our adj. EBITDA forecasts for this year and the next few years remain almost unchanged, but the decrease in depreciation forecasts has raised the forecasts for the lower lines. We now expect Koskisen to grow by 9% this year, with adj. EBITDA-% of 10.2%. We predict that Koskisen's result will turn into a fairly clear upswing from Q3, when the comparison figures start to weaken, and that from next year lower interest rates and a return of trust will slowly revive demand in the construction sector, especially in the Sawn Timber Industry. Our forecasts are still well below Koskisen's target of over 15% EBITDA-% (2024e-2027e 10-12%), and reaching the growth target (500 MEUR revenue in 2027) will require acquisitions.

Valuation more or less at the right level in our view, and expected return reflects required return

Koskisen’s 2024 and 2025 EV/EBITDA ratios that consider the strong balance sheet are 6x and 5x and the P/B ratio (Q2’24 act.) is around 1.2x. We expect the dividend yields for the next few years to be around 4%. The multiples are close to the upper end of the ranges we accept, taking into account the company's estimated return on capital and risk profile. The DCF value is also around the current share price level with our current conservative parameters. In our view, Koskisen's expected return for the year is still in line with the required return over the 12-month horizon. We therefore maintain our cautious stance on the stock, although there could be leverage in the stock in the medium term if the European construction recovery were to surprise positively in the coming years 2025-2026.