Componenta Q2'24: On firmer ground

This report is a summary translation of the report “Tukevammalla maaperällä” published on 7/23/2024 at 11:45 am EEST.

Componenta's Q2 figures were better than expected, except for financial expenses. The market outlook is mixed but positive overall. After a stronger-than-expected Q2, our profitability forecasts have increased. There is still a lot of justified upside in the stock. We therefore reiterate our Accumulate recommendation. We keep the target price unchanged at EUR 3.60 until the pending acquisition can be meaningfully factored into our forecasts. 

Q2 on the right track

Q2 revenue was slightly ahead of our expectations, although down 10% y/y. Revenue reflected the weak order backlog in Q1 as well as the lower main raw material and energy index levels included in sales prices. Of the total H1'24 revenue decline (-17% y/y), the drop by customer sector was most pronounced in machine building, agricultural machinery and forestry machinery, but this was compensated by the energy industry and particularly the defense industry. The Q2 result was better than expected and the EBITDA margin of 7.8% was already close to the level of Q2'23 (8.8%). Profitability was no longer significantly affected by the quality problems in the ramp-up of volume products, which had previously weighed on the result, but rather under pressure from lower-than-normal volumes. Componenta noted, however, that at the Q2 revenue level, capacity utilization in most factories was “above the critical point” in terms of profitability.

Upturn in sight

Componenta’s outlook comments for 2024 were unchanged. Even though there is some variation in order intake by customer and industry, the outlook for 2024 as a whole remains broadly positive. Componenta still expects volumes in H2'24 to be higher than in H1'24. Serial products are expected to have a positive impact on the result as deliveries rise to their expected level. Among customer industries, agricultural machinery (incl. tractors) is the weakest, but in the machine building, customer order books are starting to show signs of growth. The outlook for forestry machinery is flat, but there is a clear upturn in the energy and particularly the defense industries. Componenta still continues to expect 2024 revenue and EBITDA to improve from the previous year, with the improvement clearly concentrated in H2'24. The Q2 numbers were a positive surprise and reduced the pressure to meet guidance. With better-than-expected Q2 profitability and mostly positive outlook comments, we have raised our EBITDA forecasts for 2024-2026 by 7 to 10 %.   

A lot of share price potential on the table

According to our calculations, the expected total return on Componenta's share clearly exceeds the required return. With the 2025 EV/EBITDA calculation, the total return is +27% p.a., which is far above the ROE requirement of 12%. Using a P/E-based calculation, the total expected return is a more modest +16%, but still above the required return. Overall, the stock's risk-adjusted return remains attractive. The stock's discount of the 2025 EV/EBITDA, EV/EBIT and P/E multiples is -30...-42% relative to the peer median, well above the -25% we believe is justified. All in all, the stock is also cheaply priced on a peer basis. The DCF model indicates a EUR 4.4 value for the share to which there is a substantial upside of +45%.