This report is a summary translation of the report “Haastavat ajat jatkuvat, mutta pitkä peli houkuttaa” published on 7/24/2024 at 8:00 pm EEST.

The demand challenges seen in the charging market stem from over-investment by charging operators in 2022-23. We expect that lower customer inventory levels and the acquisition of new customers will turn Kempower's sales into growth in 2025, with a clear turnaround in profitability. We find the long-term growth of the target market and the competitive value creation potential of Kempower's products as attractive at the current share price. We raise our recommendation to Accumulate (previously Reduce) but reduce our target price to EUR 16 (previously EUR 19), due to the increase in the required return, among other factors.

Large European customers are digesting their charging inventories

The key figures for Q2 were already known with the release of Kempower's profit warning on July 11. Revenue and order intake were down 21% and 37% respectively year-on-year. According to Kempower, the weak demand was due to high inventory levels at key customers, which limited equipment sales even as charging equipment installations increased (2024e: 20% in Europe and 40% in North America). Revenue declined significantly in Europe outside the Nordic countries, but grew well in North America, which already accounts for 10% of revenue. Operative EBIT remained at -8.5 MEUR due to weak revenue. Gross margin decreased to 44.4% (Q2'23: 51.1%), of which 3.9 percentage points were due to inventory write-downs and 1.6 percentage points to an increase in personnel costs in manufacturing due to lower utilization rates. Kempower estimates that its market share has remained stable in its key markets.

Management focus on adjusting cost base and onboarding new customers

Kempower reiterated its guidance for 2024, which was first issued on July 11 and is much more pessimistic than before. In our view, management's comments conveyed a determination to return to positive performance levels by the end of the year. We believe there really is room for efficiency gains in the organization after the frenetic hiring frenzy of 2022-23. Even the current revenue guidance assumes a small pick-up in demand in H2 (compared to H1) and thus carries a small risk in our view. On the other hand, Kempower has managed to expand its customer base considerably in H1 and is aiming to realize the sales potential within a short timeframe. We believe price competition is likely to intensify in the weak demand environment and have lowered our margin forecasts, resulting in a 9% decline in 2025e EBIT.

In terms of market turnaround, only the timing is unclear

The current weak demand in Kempower's target market is due to the exceptional market of 2022-23, when component shortage and the rapid electrification of transportation led customers to hoard chargers. However, the trend towards electrification of transportation will continue and may intensify again in the coming years, e.g., with new cheaper car models, electrification of heavy transport and lower interest rates. If sales were to pick up in line with our forecasts, the valuation would soon become cheap (EV/EBIT 2026-27: 16x and 12x). We believe that Kempower will be a long-term winner in the charging market thanks to its distinctive and competitive product range. The company has reached a critical market scale and its strong balance sheet limits risks in difficult times when weaker competitors are failing. The target price of EUR 16 corresponds to our fair value EV/EBIT multiple of 15x in our 2027 projections. We have raised the return on equity requirement to 9.2% (was 8.8%), due to the realization of the risk level associated with demand volatility. Demand challenges may persist in the near term and the investment story relies on long-term earnings growth, which makes the stock's valuation risk high.