This report is a summary translation of the report “Yllätyksiä ei tahdo löytyä edes etsimällä” published on 7/29/2024 at 8:13 am EEST.

We reiterate our Accumulate recommendation for Incap with a target price of EUR 13.50. Incap's Q2 developed fully in line with our expectations as the quarterly turnaround progressed, especially with the recovery of deliveries to the largest customer. We did not make any forecast changes after the report. Incap's earnings trend is turning upward in H2, against which the stock is still moderately priced (2025e: EV/EBIT 8x). Thus, the stock's expected return is attractive over the one-year and medium-term horizons. Our extensive report on Incap, published in June, is available here. 

Quarterly turnaround progressed practically as expected

Incap's revenue grew by 2% to EUR 57.6 million in Q2. In organic terms, the trend was still negative, as the acquisition of Pennatronics in July 2023 increased Incap's revenue by an estimated 15 percentage points. In Q2, Incap continued to be slowed by the underutilization of production at the Indian factory to lower the inventories of the largest customer. However, deliveries from India, in practice deliveries to the largest customer, accounted for the majority of Incap's quarterly revenue growth of around 6 MEUR, or 12%, so the situation is improving in this respect as expected. Incap's adjusted EBIT for Q2 decreased by 17% from the comparison period to 7.0 MEUR, which was also very much in line with our forecast. There were no deviations in the cost structure either compared to forecasts. However, the 11.7% adjusted EBIT margin that Incap achieved in Q2 was another figure that most of its peers can only dream of, even in a peak cycle. Financial expenses and taxes were also in line with expectations, so that Incap's Q2 EPS of EUR 0.17 was exactly what we expected. H1 cash flow remained weak for working capital related reasons, but this was expected given the quarterly growth reversal and the atypically low level of receivables at the end of 2023. The development of the customer structure was also fully within our expectations.

No changes to estimates after the report

Incap reiterated its guidance for the current year, raised in July, according to which this year's revenue will be higher than last year's and EBIT will be at the same level as last year.  Last year, Incap made an EBIT of 28.2 MEUR with revenue of 222 MEUR. In addition, Incap continues to expect both revenue and EBIT to increase on a quarterly basis throughout the year. Both estimates were as expected and in line with our forecasts. We did not make any forecast changes after the report. We expect Incap's revenue to grow by 6% this year to 236 MEUR and EBIT to grow by 4% to 29.5 MEUR. In the coming years, Incap should have a good capacity for organic growth due to its competitive position, and we expect an average revenue-driven adjusted EPS growth of around 15% for the period 2025-2027, as volumes from the largest customer return to growth, new customer acquisition and cross-selling progress, and the market recovers once the economic situation improves. The main risks to our forecasts relate to the continued significant revenue share of the largest customer, global investment demand and increased competition. 

Expected return still exceeds the reduced required return although this year's multiples are slightly elevated

Incap’s adjusted P/E ratios for 2024 and 2025 based on our estimates are 15x and 13x, and the corresponding EV/EBIT ratios are 10x and 8x. This year's multiples are a bit above historical levels and at the upper end of our approved range, so the stock is not remarkably cheap in the near term. However, next year's multiples are moderate. Thus, we see the 12-month expected return on the stock as attractive. Given the favorable medium-term earnings growth outlook, we believe the expected return over the longer term is good at current valuations. The DCF value, which is at our target price level, also supports a positive view on the stock.