Translation: Original comment published in Finnish on 2/1/2024 at 6:56 am EET.

LapWall will publish its H2 report on Wednesday at 9 am EET. Given LapWall's narrow and unchanging guidance for the whole year (2023 adj. EBIT 4-4.5 MEUR), the surprise element with the Q4 figures is quite limited. In its short stock market history, LapWall has only provided earnings guidance after H1, so the guidance is unlikely to give a clear indication of expectations for the current year.

With housing construction at a sluggish level, LapWall is unlikely to achieve good figures this year, although we expect market commentary to contain cautious optimism. In addition, our attention will focus on the progress of the major investment plan for the Pyhäntä factory announced at the end of the year (our comment on this is available here). We expect LapWall to reduce its dividend by 37% to EUR 0.12 per share due to the decline in 2023 earnings and the preparation for the major investment.

We estimate that Q4 has been on track with Q3

LapWall's revenue fell by almost 20% in Q3 (and H1), mainly due to the residential construction-driven wall panel segment. In the roof element segment, which is driven by public and industrial construction, demand has been healthy and the inorganic cooperation with Kastelli slightly supported growth in Q3. We expect the same picture to continue in Q4 and forecast LapWall's H1 revenue to fall 18% to 22 MEUR, mainly driven by volumes and to a lesser extent by prices.

We forecast LapWall's adjusted EBIT for H2 to be around EUR 2.2 million. As a result, LapWall's decline from the strong comparison period significant, but our estimate would correspond to an adjusted EBIT margin of 10%, which would be reasonable for the company given the difficult market conditions in the construction sector as a whole. Earnings levels are being maintained by the roof element factories in particular, which are probably still performing well. The 9-month performance and our forecast for Q4 puts LapWall's adjusted EBIT at the lower end of the guidance range for the full year, so there is little risk of disappointment in the operational Q4 figures. In the lower lines, EBIT is burdened by the amortization of group goodwill, which we treat as an adjustment item. We forecast LapWall's financing costs to have been low in H2 and the tax rate to have settled at its normal level of just over 20%. As such, our estimate for adjusted EPS is almost half below the comparison period at EUR 0.12, mirroring the drop in EBIT. In terms of cash flow, H2 is also likely to be sluggish, as the company's working capital is typically negative, which strangles cash flow as revenue falls.

The market is difficult, but the hypothesis of market share growth will still be tested

In the first two years of its stock market history, LapWall has only provided full-year earnings guidance in the H1 report. Given the weakness in housing construction and still high interest rates, LapWall's outlook is weak, especially for the early part of the year, while we expect demand to pick up slightly towards the end of the year as interest rates fall. Taking into account the described market scenario, last year's declining supply in the precast market (incl. bankruptcies) and the strategic cooperation with Kastelli, we expect LapWall's revenue to grow this year by just under 10% to 45 MEUR and adjusted EBIT by 23% to 5.1 MEUR. In our view, LapWall should at least report continued normal demand for roof elements and be confident about the company's market share growth in wall elements already this year to avoid disappointing prospects.

Increasing market share in the fragmented Finnish wall panel segment, driven by residential construction, is also a key thesis for the major Pyhäntä investment. In our view, LapWall should be able to prove the hypothesis of market share growth even in a bad market situation, taking into account its competitive advantages (incl. efficiency, environmental friendliness and quality) and the exit of certain competitors.