HKFoods Q2'25: Strong cash flow could accelerate hybrid redemption

Translation: Original published in Finnish on 8/7/2025 at 8:25 am EEST

HKFoods achieved a material and expected improvement in earnings in a challenging operating environment. The faster-than-expected strengthening of the balance sheet in H1 could, we estimate, enable the redemption of the hybrid bond as early as September 2025, which could have a moderately positive impact on the risk and value creation profile of the share. We raise our recommendation to Accumulate (previously Reduce) and our target price to EUR 1.7 (previously EUR 1.5).

Earnings improved in a challenging environment

In Q2, revenue dropped 3.5% year-on-year due to factors such as the timing of high export volumes in the comparison period, strikes, challenges with beef availability, and the impact of the cool summer on demand for barbecue products. However, the company was able to increase its adjusted EBIT to 6.5 MEUR (Q2’24: 4.4 MEUR, our estimate: 7.1 MEUR) through improved operational efficiency and favorable sales mix, both of which were particularly evident in the gross margin (+1.3 pp y/y). Cash flow from operating activities in Q2 was stronger than in the comparison period and our projections, and net working capital is now 14 MEUR lower than a year ago, partly due to beef inventory levels, which the company also expects to remain low in the near future.

Rate of profit growth decreasing

We slightly lowered our revenue forecasts for 2025–27 (by approximately 2%) but increased our EBIT forecasts modestly (by 1–4%) as the company demonstrated further progress in its turnaround during Q2. Our EBIT forecast for H2 is 1 MEUR lower than a year ago due to factors such as rising beef prices and strong results in the comparison period, but we still expect the company to clearly meet its guidance, according to which adjusted EBIT will grow from 2024. We estimate that earnings growth in the coming years will be moderate compared to the strong consecutive earnings growth seen in the last 10 quarters. Although the company will continue its efficiency program for at least another year, we believe the effects of the most straightforward measures are already largely reflected in the actualized earnings figures.

Stronger balance sheet may provide opportunity for hybrid redemption

In its Q2 report, HKFoods did not comment on its intentions regarding the redemption of the hybrid bond, though the company did state that it is still analyzing the option. The redemption window will open in mid-September. In our view, the company might now have the opportunity to redeem the hybrid bond given the stronger cash flow than we expected in H1. Calculated using Q2 figures, net debt/EBITDA was 2.5x, which would weaken to 2.9x if the hybrid were redeemed. There is a thin cushion to the covenant (3x), however. According to our calculations, the net gearing covenant would remain intact as well. We have also calculated these figures based on the end-of-Q3 situation, which likewise supports the possibility of redeeming the hybrid bond. Redeeming the hybrid would save the company financing costs and could alter shareholders' perception of the company's risk and value creation profile. We have included the hybrid's quick redemption in our forecasts, but there is no guarantee that it will occur.

Valuation rather tight, but there is upside potential

HKFoods' current earnings-based valuation (adj. EV/EBIT 2025e: 10x, P/E: 21x) is not particularly attractive, but as the balance sheet strengthens and financing costs decline, P/E-based multiples will decrease rapidly. With a fair P/E ratio of 10x applied to 2027, the share's expected return would be roughly in line with the required return. We consider our current estimates to be relatively low-risk. In a positive scenario, earnings growth could continue to exceed our forecasts, which would have a significant leverage effect on the share price. Our change in recommendation also partly reflects the expected impact of the hybrid redemption on the market's required return on the share, which could positively affect the share price.