Suominen Q2'24: Earnings level still patchy

This report is a summary translation of the report “Tulostaso edelleen tahmea” published on 8/10/2024 at 11:05 am EEST.

Suominen’s Q2 results missed expectations but were better than the comparison period, and the company reiterated its guidance for adj. EBITDA improvement in 2024 vs. 2023. Our forecasts for this year and next year were substantially lowered due to the surprisingly persistent weak level of the company's results. In our view, the stock is already priced for a much better earnings level, which we believe the company will not reach until 2026 at the earliest. We reiterate our Reduce recommendation and lower our target price to EUR 2.45 (previous EUR 2.5) due to the lower forecasts.

Revenue turned to growth, result roughly in line with previous quarters

Suominen's Q2 revenue grew by 5%, while we only expected it to be flat year-on-year. The growth was driven by volume growth while average prices declined, although the improved sales mix provided some price support. Suominen’s adj. EBITDA was 5.0 MEUR, better than the weak comparison period (2.7 MEUR). However, adj. EBITDA fell short of our and consensus expectations by about 6 MEUR, and the result was in the red on lines below EBIT. Earnings have now been at a level of around 5 MEUR in adj. EBITDA for four quarters in a row, thus repeatedly disappointing expectations of an upward earnings trend. The company said that the improvement in earnings, which has been mainly driven by efficiency measures, has also been slower than the company's own expectations.

Guidance for improving result unchanged, but forecasts continue to be revised downwards

Suominen reiterated its guidance for this year, i.e., it expects the comparable EBITDA for the whole year to increase (2023: 16 MEUR). Last year, the improvement based on the same wording was less than 1 MEUR and performance was weaker than expected throughout the year. The weaker than expected H1'24 was therefore a continuation of this trend. However, Suominen already improved its adj. EBITDA by 4 MEUR during H1, so no further improvement is needed in H2 to meet the guidance. Still, we expect a slight improvement in H2 compared to both H1 and the comparison period. We forecast full year adj. EBITDA to amount to 22 MEUR. Following the weaker-than-expected result, however, we have significantly lowered our earnings forecasts for both this year and the next.

Earnings turnaround may still be slower than expected

Suominen's result is weak for the third year in a row. We believe competition is tighter than before the COVID years, as the sector invested heavily in new capacity when demand was high. We believe that this is also reflected in price/margin pressure for Suominen. As Suominen's production is almost entirely in countries with higher cost levels, it is exposed to competition from cheaper production countries, too. Although the turnaround seems to have begun towards the end of 2023, it has not progressed in recent quarters (compared to previous quarters) and the earnings level is frail. We still see a risk of a slower-than-expected turnaround, which also increases uncertainty about Suominen's earnings potential.

The share is already pricing “normal” earnings, we feel the expected return is weak

We now feel that Suominen’s normal earnings level is around 20 MEUR, which we believe will materialize in 2026. Even at this earnings level, the company's valuation multiples are neutral or slightly high, so we see the earnings growth between 2024-26 being used to digest the multiples. Considering the limited competitive advantages, we do not believe that the company will be able to achieve a return on capital that is substantially above the required return in the long term, and thus the P/B ratio should be close to 1x, so the 1.3x of 2025 also seems high. The expected return will therefore be based solely on the dividend yield, which will remain below 5% in the coming years.