HKFoods Q1'25: Convincing evidence of an earnings turnaround

Translation: Original published in Finnish on 05/08/2025 at 08:26 am EEST

Profitability improvement continued in Q1 slightly stronger than expected, although the beginning of the year was challenging in terms of market conditions and the timing of Easter. Our confidence in the sustainability of the earnings turnaround has strengthened. We also feel the company has the opportunity to continue improving its profitability closer to the level of its competitors, which means the expected return could rise significantly. Balance sheet flexibility remains limited and financing costs are high, which partly weighs in the balance. We raise our recommendation to Accumulate (previously Reduce) and our target price to EUR 1.30 (previously EUR 1.00).

Better profitability than expected in a difficult market

Q1 was positive as HKFoods improved its result slightly more than we expected, although weak domestic consumer demand weighed on revenue growth in Q1. Revenue grew slower than expected, only 2% y/y, and we believe organic growth was slightly negative. In retail, sales decreased as consumers favored cheaper products, but in Foodservice, HKFoods reported that it had gained share. The share of exports increased significantly, e.g., supported by Chinese poultry exports and the impact of the accounting technical changes in the Polish bacon unit. Both adjusted EBIT and EBITDA improved by 3.2 MEUR from the comparison period. EBIT improved to 4.6 MEUR (Q1’24: 1.4 MEUR), which slightly exceeded the 3.4 MEUR level we expected. Financial expenses were also slightly lower than our forecast, so EPS reached zero (we expected EUR -0.02).

Earnings development slows down towards the end of the year in our estimates

HKFoods maintained its guidance for 2025 and expects comparable EBIT to increase from the previous year (27.7 MEUR). We cut the group's revenue estimates slightly (1-2%), but raised EBIT estimates by 6-10%, i.e., 2-3 MEUR for 2025-27, after the Q1 report's profitability exceeded our estimate. We expect 2025 EBIT to improve to 30.7 MEUR, but the improvement is related to the already realized Q1, as our earnings forecasts for the rest of the year are at the comparison period level as a whole. We expect the company to be still able to improve its earnings in Q2 from weak comparison figures, even though the food industry strike in early April will impact company earnings negatively by some 1-2 MEUR. In H2, we believe earnings will decline slightly, as we expect, e.g., consumer demand and the cost environment to weaken from the comparison period. HKFoods is carrying out several small efficiency-improving investments this year, but we expect their impact to be less than the larger automation investments completed in mid-2024. However, we still see opportunities for the company to improve its profitability in the medium term as market conditions improve, supported in part by new growth investments in ready-made products that will be completed in 2025.

If the earnings turnaround continues, the upside is still high

The current earnings-based valuation of the stock, measured by EV/EBIT is at fair level (2025e: 9.1x) and high measured by P/E at 26x, e.g., due to financial expenses. Moderate earnings growth, balance sheet strengthening, and the redemption of the hybrid bond (in our forecasts in fall 2026) would lower the P/E ratio to only 7x in 2027e. With a fair P/E ratio of 10x, the stock would thus have an annual upside of about 14% until 2027. If HKFoods' earnings level continued to improve significantly towards the level of its competitors (Atria Suomi and Snellman EBIT 2024: 4.7% of revenue), it would strongly increase the value of the stock due to the company's high leverage (in the 4.7% scenario, the value of the stock would more than double). In our view, balance sheet risks have decreased slightly, although financial flexibility remains limited (net debt/EBITDA: 2,6x).