Componenta: Unfortunate, but not very surprising

Translation: Original published in Finnish on 11/28/2024 at 11:35 am EET.

Componenta's negative profit warning was not a complete surprise given the difficult operating environment. Our earnings forecast cuts are significant in percentage terms, but not so much in euros. Even with our reduced forecasts, the stock is cheap after Tuesday's decline. Therefore, we maintain our Accumulate recommendation. Due to the changed earnings expectations in the near term, we are lowering the target price to EUR 2.90 (3.30). 

Pressure on the old guidance increased during the fall

Componenta's negative profit warning has been slow to mature, given the continued challenging operating environment and the fact that the previous 2024 guidance was challenging from the get-go. Componenta now expects 2024 revenue and comparable EBITDA to be below the 2023 level, compared to the previously expected increase. Contrary to earlier expectations, order intake and order book are declining for the rest of the year. This is due to continued weak customer demand, changes in production plans and the postponement of Componenta's deliveries until mid-2025, as well as ongoing strikes and preparations for them in Finland. The reduction in the 2024 EBITDA guidance is a direct consequence of the reduction in volume expectations.   

We have updated our 2024 revenue forecast, and the reductions have impacted revenue across virtually all customer groups. Our new forecast implies a -4% year-on-year decline in revenue. We now expect comparable EBITDA for 2024 to be 4.0 MEUR (margin 4.1%) when our previous forecast was 5.7 MEUR (margin 5.6%) and actual level of 5.3 MEUR in 2023 (margin 5.2%). Due to a shift in customer deliveries, we have lowered our revenue forecast for 2025 by -2%, and Componenta's relatively high operating leverage means that the negative changes in the bottom lines of the income statement are larger. The forecast changes for 2026 are already quite marginal.

Long-term approach and patience required

Componenta's profit warnings are not unusual, as Tuesday's is the third in just over a year. Repeated profit warnings keep the company's short-term predictability low and raise its risk profile. However, we do not see this as undermining Componenta's strengths, which are strong relationships with strong customers, improved cost flexibility and a strong cash flow profile. However, investors should be prepared for a rather long wait for positive price drivers, as Componenta will not report its Q4 results until March 2025. By then at the latest, we hope to see 1) improved signals on the market outlook for Componenta's key customers, 2) the smooth integration of the Fortaco acquisition, and 3) the start of the delivery ramp-up for the large order from the Finnish Defense Forces.     

According to our calculations, the expected total return on Componenta's share clearly exceeds the required return. With the 2025 EV/EBIT calculation, the total return is 16% p.a., which is above the ROE requirement of 12%. With a P/E-based calculation, the total expected return is 17% p.a. and overall, the risk-adjusted return on the share is attractive. All of Componenta's key valuation multiples for 2025 are well below the peer group median: The discount of EV/EBITDA, EV/EBIT and P/E multiples is 32-60%, clearly more than the 20-30% we believe is justified. The DCF model indicates a whopping 77% upside for the share.