HKFoods Q3'24 flash comment: Profitability developed strongly

Translation: Original published in Finnish on 11/6/2024 at 09:31 am EET

HKFoods reported its Q3 interim report today. The quarter’s strong result was partly foreseeable with the positive earnings revision issued in September, but the profitability nevertheless exceeded our forecast. We believe the strong performance is particularly related to better operational efficiency and improved market conditions.

Growth at a good level, but slightly below our forecast

HKFoods’ Q3 revenue from continuing operations was 252 MEUR, up by 9% from the comparison period (our forecast 12%). According to the company, revenue was boosted by successful commercial measures and a comprehensive product portfolio. The company especially mentions that the sales of the foodservice channel has developed strongly. Retail sales is also reported to have developed positively, which improved the sales structure and profitability. Sales of the Polish bacon unit to Sweden is now reported as external sales, which in accounting terms raises revenue from the comparison period. The impact of this on growth is not reported, but in our preview, we estimated the impact to be 6 percentage points.

Profitability improved significantly

Profitability developed strongly in Q3 with adjusted EBIT of continuing operations being 11.6 MEUR (Q3’23: 6.6 MEUR) exceeding our forecast of 9.1 MEUR. Growth and a good sales mix naturally supported earnings development. The company also reports that the investment in its poultry cutting plant has exceeded its efficiency improvement targets. The gross margin improved to 8.9% in Q3 (Q3'23: 7.4%), which was a significant component of the earnings improvement from the comparison period next to the revenue increase. Fixed costs increased slightly from the comparison period. We believed that the upward pressure on raw material procurement-related cost items eased during the summer, but HKFoods writes in its Q3 report that the cost level has remained high, which is justified by the upward pressure on external service prices and salaries. Net financial expenses in Q3 were 5.0 MEUR and thus 3.4 MEUR higher than our forecast. However, EPS of EUR 0.05 clearly exceeded our forecast (EUR 0.02).

The outlook suggests continued earnings improvement during the rest of the year

HKFoods upgraded its 2024 guidance on September 26 and it was not changed in the Q3 report. The comparable EBIT of the Group’s continuing operations is estimated to be 22-25 MEUR. The previous guidance estimated that the comparable EBIT of continuing operations would improve from 2023 (adj. EBIT: 11.6 MEUR). Current guidance requires Q4’s adjusted EBIT to be 4.6-7.6 MEUR, i.e. to improve from the comparison period (Q4’23: 3 MEUR). The company is currently investing in expanding its product range, e.g., in the production of ready-to-eat products in the Eura unit (8 MEUR investment) and ready meal production in the Vantaa unit (5 MEUR investment) to generate growth in coming years. The divestment of the Danish businesses was completed at the end of October, which means that the company’s restructuring is now complete and the work to improve efficiency in the remaining businesses, mainly focusing on Finland, continues.