Incap Q3'24: If earnings growth materializes, expected return would be strong

Translation: Original published in Finnish on 10/28/2024 at 8:53 am EET.

We raise our recommendation for Incap to Buy (was Accumulate) and revise our target price to EUR 13.00 (was EUR 13.50), reflecting slightly negative forecast changes. Incap's Q3 was exactly what we expected. There is some uncertainty surrounding the company's outlook, but we have not made any forecast changes beyond negative fine-tuning so far and expect the company to remain on track for earnings growth in the near future as well. In our view, the expected return on the stock is already very good, driven by earnings growth (2025e: EV/EBIT 8x).

Quarterly turnaround progressed practically as expected

Incap's revenue grew by 2% to 62 MEUR in Q3, in line with our forecasts. The main growth driver was the normalization of deliveries to the largest customer after the acute destocking phase, which continued the ramp-up of production at the Indian factories (vs. the rundown in the comparison period). In addition to the continued turnaround in India, a positive development was that sales to customers other than the largest grew by 6% in Q3. Given the prevailing market conditions, we believe this was a strong outcome as several peers, for example, saw their revenue decline by up to 20% in Q3. We estimate that the US factory in particular has maintained very strong momentum. In Q3, Incap's adjusted EBIT increased by 26% to 8.1 MEUR (adj. EBIT-% excellent 13.1%), which was also very much in line with our forecast (although EBIT included a higher-than-normal other income of 0.8 MEUR and an inventory write-off of 0.3 MEUR). Financial expenses were higher than expected for non-cash FX reasons, while there were no surprises in taxes. As a result, Incap's Q3 EPS increased to EUR 0.17, slightly below forecasts.

We trimmed our projections slightly

As we expected, Incap specified its guidance for the current year in numerical terms and now expects to achieve revenue of 227-237 MEUR this year (previously higher than last year) and EBIT of 27.5-30.0 MEUR (previously at last year's level). Our forecasts were at the upper end of the range but given the recent weak macroeconomic and industry news flow (incl. profit warnings from competitors), the mid-point of the range being below expectations was not a huge surprise. There is also considerable uncertainty about the outlook for Incap, particularly in the wake of the European economic malaise, although no clear obstacles to continued positive developments emerged from the cautious comments. We trimmed our near-term projections slightly. We expect Incap's revenue to grow by 5% to 234 MEUR this year and EBIT to decline by 4% to 28.6 MEUR. Being highly competitive, Incap should have a good capacity for organic growth, especially in India, and we expect the company to post Q3'24 LTM-2027 average adjusted EPS growth of around 20% on a revenue-driven basis (incl. recovery of the largest customer, cross-selling, new customer acquisition and gradual improvement of the economic situation). The main risks to our forecasts relate to the continued significant revenue share of the largest customer, global investment demand and 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. Consequently, we consider the 12-month expected return on the stock, driven especially by earnings growth, to be already very attractive, despite the uncertainties surrounding the rate of earnings growth. The DCF value, which is around our target price level, also supports a stronger positive view on the stock.