Customer demand clearly weakening more than expected is turning this year’s result negative and pushing achieving reasonable earnings-based valuation levels toward the end of the decade. The electrification of transport and the high competitiveness of the company’s products still enable value creation in the medium term. However, low visibility to growth in the next few years decreases the risk/reward ratio to negative, thus we lower our recommendation to Reduce (was Buy) and the target price to EUR 19 (was EUR 28).

Customer demand has not yet recovered

Kempower issued a profit warning on Thursday, July 11 at 6.15 pm, and provided preliminary information on Q2’s orders, revenue and operating result. Q2’s order intake was significantly lower than expected at 54 MEUR (Q2’23: 86 MEUR, Inderes forecast 82 MEUR, consensus 84 MEUR). Revenue also decreased to 57 MEUR (-21% y-o-y). The operational EBIT was negative at -8.5 MEUR, which we believe is mainly caused by the lack of scale and the higher mass of fixed costs.

Acceleration sought from a lower revenue level than in the previous year

Kempower's new guidance expects that its 2024 revenue will be 220-260 MEUR (previous 360-410 MEUR, 2023: 284 MEUR). The guidance cut was much more severe than we expected (our forecast 343 MEUR, consensus 354 MEUR). The guidance cut is related to weak demand, which, according to the company, is due to, e.g., customers' high inventory levels and slow installation based on lack of availability of network connections. The operational EBIT margin is guided to be negative, but to improve to zero by Q4. The company has increased its fixed costs significantly during 2023-24, while opening new factories in the US and Lahti, Finland and growing its organization. Kempower expects to make significant short- and medium-term changes to the cost structure to optimize the efficiency of the organization, which we estimate could, together with growth, support profitability in the coming years. As a result of the severe profit warning, we cut our 2024 revenue forecast by as much as 30% (to 240 MEUR), but our forecasts for later years decreased less (2028e revenue decreased by 17%). We estimate that the EBIT margin will recover to 6-10% in 2025-26, but we no longer expect profitability to improve to the strong 2023 level (EBIT 14%) even in the long term. Our EBIT forecasts for 2026 decreased by 41% due to high operational leverage.

Long-term potential should not be ignored, but the current risk/reward ratio is not attractive

Our previous valuation for Kempower was based on its strong growth and profitability track record, especially in 2023, and on the assumption that the growing cost structure will within a year be reflected in a significant increase in revenue through new factories and wider distribution. However, with the profit warning, fresh investments turning profitable is further ahead than expected. Earnings-based valuation multiples for the coming years have risen to very high levels (EV/EBIT 2025: 67x and 2026e 28x). The high growth potential of the market and the strong competitiveness of the company’s products will continue to enable significant value creation in the medium term, but for now visibility to improving growth has weakened and the valuation no longer turns attractive with our lower forecasts within a 2-3-year time horizon. More reasonable valuation multiples can only be achieved with our 2028-29 forecasts (EV/EBIT: 13-16x).