Kreate Q4 morning result: Strong earnings and cash flow lead to dividend surprise

Translation: Original comment published in Finnish on 1/31/2024 at 9:33 am EET.

Kreate reported its Q4 results this morning, which were well ahead of our expectations. Revenue was lower than we expected, but at the same time EBIT improved year-on-year and exceeded our forecast by more than 20%. Due to the strong bottom line and especially the strong cash flow, the dividend proposal was well above our forecast. In 2024, Kreate sees a slightly sharper decline in revenue than we expected, but earnings are expected to improve in line with our forecasts. The outlook suggests that demand has picked up, providing a good basis for selective bidding. Overall, the earnings improvement in 2024 is on a solid footing as both market and cost challenges gradually abate.

Revenue already coming down

In Q4, Kreate's revenue decreased by 3.5% to around 80.2 MEUR, below our forecast of 86.5 MEUR. The decline in revenue was stronger than expected, but for the full year, Kreate's revenue grew strongly by 17% to 320 MEUR. This is already above Kreate's strategic target level for 2024 (300 MEUR). The growth in revenue has been driven by a strong order book and the rapid progress of ongoing projects. By business line, in Q4, revenue still increased in structural engineering by 7% to 60 MEUR (Q4'22: 56 MEUR), mainly due to a strong pull in Swedish (Sweden Q4: 7 MEUR vs. 3 MEUR y-o-y). In transport infrastructure construction, revenue fell by more than 20% to 21 MEUR, due to delays in project start-ups and a more challenging market. The order book continued at a good level (196 MEUR) but was clearly down year-on-year (-36%) as expected.

Very strong profitability

Kreate's EBITA increased clearly from the comparison period to 2.7 MEUR (Q4'22: 2.3 MEUR), exceeding our forecast of 2.2 MEUR by more than 20%. The EBITA margin rose to a strong 3.4% (Q4’22: 2.8%) and also clearly exceeded our forecast of 2.5%. Project costs fell clearly and savings were also seen in other operating expenses. The completion of the company's old cost-intensive projects was also reflected in what we estimate to be a good result for the quarter. On the bottom line, the figures exceeded our forecasts by the same ratio and EPS stood at EUR 0.18 (Q4'22: 0.14 MEUR).

For the full year, Kreate achieved an EBITA of 7.8 MEUR, close to the mid-point of the guidance range of 7.0-8.5 MEUR. The proposed dividend for 2023 was EUR 0.48, while we expected a dividend of EUR 0.30. This translates into a dividend yield of around 6% at the current share price. Contrary to our expectations, the company kept its dividend proposal on an upward trajectory (2022: 0.46) but split the dividend payment into two tranches to ease the cash flow impact. The higher dividend was helped by a significant improvement in cash flow at the end of the year, as working capital was freed up from major projects. In Q4, operating cash flow amounted to MEUR 20 (Q4'22: 15 MEUR). The company's cash and cash equivalents increased to 24 MEUR (Q4'22: 9 MEUR) and net debt decreased to 17 MEUR (Q4'22: 33 MEUR). With the decrease in net debt, the company's indebtedness has already fallen to a very good level during the year (net debt/adjusted EBITDA: 1.2x < 2.0x target).

Outlook and guidance bode for a reasonably good year

The guidance and outlook were almost in line with our expectations. Kreate estimates that in 2024 revenue will decrease and amount to 270-300 MEUR (2023: 320 MEUR). EBITA is expected to grow to 8-11 MEUR (2023: 7.8 MEUR). We expect revenue before profit to fall by 6% (2024e: 306 MEUR) and profitability to rise strongly as cost challenges recede (2024e adj. EBITA: 9.6 MEUR). Our revenue forecasts are under downward pressure, but we are in line with the company’s guidance. There’s potential for better too, with Kreate commenting that demand is "high" and bidding activity is brisk. With a particular focus on profitability, Kreate has left some big projects on the table, according to the report. The report also suggests that the outlook for infrastructure is strong in Sweden. Overall, taking into account Kreate's earnings trend, market outlook and financial situation, the infrastructure builder's starting point for 2024 is quite good.