Purmo Q2'24 flash comment: Weak result but focus on tender offer

Translation: Original comment published in Finnish on 7/17/2024 at 8:49 am EEST.

Purmo's result was weaker than expected, as adjusted EBITDA unexpectedly declined year-on-year and was 20% below our expectations. The company reiterated its loose guidance for adjusted EBITDA to be at or above last year's level, but forecasts are under downward pressure due to the weak result. However, we do not expect the result to have a material impact on the share price, as the main focus of share pricing will be on tender offers. Regarding tender offers, Project Grand Bidco announced yesterday that it will not increase its offer, so Haier’s latest offer is significantly higher and we believe the company's board will change its recommendation to Haier's offer.

Revenue development still on a downward trend

Purmo’s revenue decreased clearly in 2022 and early 2023, and the quarterly revenue was 24,175-190 MEUR in Q2’23-Q1’24, while the revenue trend continued to decline. The revenue level in Q2'24 was slightly below expectations and was the lowest quarterly level in years, although only 3% below our forecast. As expected, the demand situation has remained weak and revenue has declined in both segments.

Result unexpectedly down, company blames inefficiencies caused by production shifts

The drop in revenue and its negative leverage effect has a negative impact on earnings development. However, the company's efficiency program has made good progress and is supporting Purmo's results. The impact of the efficiency program was 42 MEUR by the end of Q2'24 and Purmo further estimates it to be 50 MEUR by the end of 2024. However, adjusted EBITDA was far below our expectations and surprisingly also below the comparison period. The margin also weakened despite efforts to improve efficiency. The company cites the shift of production to lower-cost countries, which led to temporary inefficiencies in operations, as the reason for the poor result. At the segment level, the larger Climate Products & Systems division in particular fell well short of our expectations, with its adjusted EBITDA down year-on-year, whereas we had expected a significant improvement supported by efficiency measures. The reported result continues to be impacted by one-off items related to the efficiency program.

Guidance repeated, downward pressure in forecasts

Purmo reiterated its loose guidance and expects the 2024 adjusted EBITDA to be at the same or higher level compared to 2023 (92 MEUR). At the same level means +/- 5% and above means more than 5% improvement. This means that the estimate range is quite wide. After H1, the company is 2.5 MEUR below last year's level, practically at the very bottom of the range. However, the company is seeing "slight optimism" and the progress of the efficiency program will continue to support the result. Despite this, our forecasts are under downward pressure due to the weak quarter.

Project Grand Bidco does not increase bid, Haier bid significantly higher

Even before the results were announced, Project Grand Bidco, a consortium of private equity investor Apollo and Rettig, the main shareholder of Purmo, announced yesterday that it will not increase its offer beyond EUR 11.15. This makes Haier's offer of EUR 13.68 announced on Monday significantly higher and we believe it is likely that the company will end up in Haier's ownership. Grand Bidco has waived the regulatory approval condition, but retained the 80% approval condition. The offer could therefore be implemented practically immediately if 80% of Purmo's owners were to accept it. However, with a bid price well below both the current share price and Haier's offer, we do not think it has a chance of success. The only advantage of Grand Bidco's offer over Haier's, in our view, is its faster timeframe of around six months and slightly higher certainty of completion. But we think these factors are not sufficient to justify the current price difference between the offers. We expect the company to dissolve the merger agreement with Grand Bidco in the near future and the board to change its recommendation to Haier's higher offer.