HKFoods Q2'24 preview: A good premise for performance improvement

Translation: Original comment published in Finnish on 7/31/2024 at 7:03 am EEST.

HKFoods will announce its Q2 interim results on Wednesday, August 7 at around 8.30 am EEST. We believe that the company is well positioned to further improve its comparable performance, driven by internal efficiency measures, a favorable grilling season and a stable cost environment. The maturity structure of the debt financing has also been extended with the bond issued in June.

Favorable conditions for revenue growth

We forecast HKFoods' Q2 revenue to reach 252 MEUR, representing an increase of almost 8% in continuing operations compared to the comparison period. The growth is supported by an increase in the external revenue of the bacon business in Poland as a result of divestments. This sale relates to the former Swedish unit of HKFoods and is now reported as part of HKFoods Finland, which is the only remaining business unit. We estimate that the increase in external revenue from Poland will have an impact of just under 6 percentage points on growth, so that fully comparable revenue growth would be around 2 percentage points. We expect the market to have been favorable for HKFoods in Q2, as good weather in May and June has supported demand for grilling. The company also reported commercial successes in the Finnish market in its Q1 report, which could signal a positive development in market share. Although it is somewhat difficult to assess the impact of Poland on growth, we believe that there’s a good premise for positive comparable developments.

Efficiency measures and a stable cost environment support profitability

We expect HKFoods' adjusted EBIT to be 5.7 MEUR (2.3% of revenue) in Q2, which would be an improvement over the comparison period (4.2 MEUR, 1.8% of revenue). In 2023-24, the company has implemented savings measures and efficiency investments aimed at an annual efficiency improvement of 12 MEUR. The result has been on an upward trend recently, with the Finnish unit's adjusted EBIT in 2023 reaching its highest level since 2007. In Q1 2024, adjusted EBIT improved by 3.7 MEUR y/y. There is of course uncertainty about the sustainability of the turnaround after decades of weak progress, but at least for Q2 the signs are good, as demand, internal efficiencies and the cost environment should support profitability. However, our earnings per share forecast is EUR 0.00 as high financing costs and interest on the hybrid bond weigh on the result. In June, the company successfully restructured its long-term financing by buying back bonds maturing in March 2025 and issuing new ones. The one-off financing costs that may result from the arrangements are not included in our current projections.

We see moderate progress towards turnaround

We expect HKFoods to reiterate its guidance that 2024 comparable EBIT from continuing operations will improve compared to 2023 (2023: 11.6 MEUR). We estimate 2024 comparable EBIT at 20.0 MEUR. In addition to the earnings development, which we consider encouraging, the financial situation has also been strengthened with the successful issuance of a new 90 MEUR bond in June. The company's debt burden is still relatively high and financing costs consume virtually all of the operating result. However, we forecast that financing costs will decline in the coming years. Favorable operational performance could allow a further reduction of the debt burden in the coming years, if the turnaround proves to be sustainable.