NIBE Industrier Q4'24 preview: Weak risk/reward keeps us on the sidelines

We have updated our short- and medium-term forecasts for NIBE, in the light of a slower-than-expected European heat pump market. While we still believe the market has largely bottomed out, driven by the normalization of inventories at the distribution level in most European markets, a meaningful recovery is likely to take time to materialize due to a slow recovery in consumer confidence and purchasing power, as well as in the new-build market. In our view, short-term drivers remain weak and the stock is already sufficiently priced in for high earnings growth (2025e P/E: 28x). As a result, we reiterate our Reduce recommendation but lower our target price to SEK 42.0 per share (SEK 52.0), mainly due to reduced estimates.

We expect the market has remained challenging in Q4

NIBE will be publishing its Q4 results on Friday, February 14th, at 8.00 am CEST. With our updated estimates we expect NIBE’s Q4 revenue was 10,670 MSEK, roughly in line with consensus, reflecting a negative organic growth of some -9% (y/y). We anticipate a revenue decline across all business areas, with Climate Solutions and Stoves impacted by inventory destocking and low construction activity, and Elements affected by weak demand in consumer goods and reduced deliveries of heat pump components. We estimate NIBE’s Q4 EBIT at 1,008 MSEK, slightly lower than consensus, reflecting a 37% drop from the relatively strong comparison figures. This decline is mainly due to reduced sales and underutilized capacity, partially offset by cost-cutting measures.

In the company’s upcoming report, we will watch closely for any comments regarding the inventory situation and the pricing landscape, where excess inventory at the manufacturing level could lead to downward pressure on prices.

We have adjusted our estimates, reflecting a slower recovery

The European heat pump market has been sluggish for the past year, and based on recent market development we believe that a recovery will be slower than earlier anticipated. On the positive side, there are some signs of a gradual market recovery, such as declining interest rates and increasing subsidy applications in Germany (~10-15% of NIBE’s total sales). However, declining interest rates are unlikely to significantly boost consumer purchasing power and confidence until earliest H2’25 and the recovery in Germany will also likely be slow due to the lag between applications and orders at the manufacturer level. Furthermore, there is also uncertainty surrounding subsidies in countries like France, and Poland, and delays in the UK's gas boiler ban. Additionally, unfavorable gas-to-electricity price ratios in Europe remain a barrier to heat pump adoption.

Considering these dynamics, we have adjusted our 2024-2026 revenue estimates downward by approximately 1-2%. In terms of profitability, we believe that volume growth and cost-cutting efforts should support margins, while increased pricing risks and inventory destocking is expected to have the opposite effect. Overall, our mid-term absolute EBIT estimates have decreased by approximately 8-9%, and we anticipate the company will return to EBIT margins at the lower end of historical levels, around 12%.

Still no sufficient expected return

2024 marks a lost year, with earnings falling significantly short of their potential due to challenging market conditions. Looking ahead, if the market environment improves and the earnings recovery we forecast materializes, the estimated 2025 valuation multiples (P/E: 28x and EV/EBIT: 22x) fall at the upper end of our acceptable range and exceed the company's historical long-term medians. The DCF is also roughly in line with the current share price, implying a limited upside to the valuation. Overall, we believe the stock is fairly priced for an earnings turnaround and that a larger upside for the stock would require a faster-than-expected adoption of heat pumps, along with easing concerns around pricing.