KH Group Q2'24: Challenges during the review period limited to Indoor

Translation: Original comment published in Finnish on 08/19/2024 at 7:45 am EEST

After a severe profit warning, KH Group’s Q2 report was a relief, as it confirmed that the deteriorating performance was solely due to the extremely poor performance of the Group’s source of grief, Indoor Group. We believe that the Group’s other assets offer value compared to the current price level but recognize the risk of value destruction through weak capital allocation to Indoor. We revise our target price to EUR 0.65 (was EUR 0.60) and raise our recommendation to Accumulate (was Reduce).

A mixed quarter

KH Group’s quarter was mixed, as KH-Koneet performed convincingly and achieved slight growth and operating result at the level of the comparison period despite the very weak sentiment in machine trade, which strengthened our view of the company’s quality. NRG’s turnaround story progressed with significant earnings growth. However, the quarter of Indoor, which focuses on the furniture trade, was very weak and singlehandedly watered down the consolidated figures of the whole Group. Despite KH-Koneet's 2.0 MEUR and NRG's 0.9 MEUR operating result, the Group’s pro forma operating result was slightly in the red, driven by Indoor (-2.6 MEUR) and unallocated items (-0.6 MEUR). The management explained the plan to improve Indoor, but the effectiveness of the program aiming at annual cost savings of 10 MEUR through tighter cooperation between Asko and Sotka stores is doubtful to us, as the previous goal was to clarify the Asko brand.

We assume the bottom of the cycle is at hand

KH Group's latest guidance indicates a revenue of 340-360 MEUR and an EBIT of 4-7 MEUR for the current year. The company sets out to the second half of the year from a chase position, as cumulative H1 earnings was -0.8 MEUR. Our pro forma revenue forecast for the current year is 358 MEUR and our operating result forecast is 5.5 MEUR. Seasonally, the second half of the year is significantly better for Indoor Group, whose streamlining should enable achieving the guidance without major improvements from other businesses. We expect 2024 to be the bottom of the cycle for KH Group’s subsidiaries and the recovering business environment will support the earnings development of KH-Koneet and Indoor Group in the coming years. For Indoor, our estimates do not consider the specific benefits of the new efficiency program at this stage, but we follow its implementation closely. In KH-Koneet, we see a prerequisite for a level correction in growth and profitability as the machine trade recovers, but we want the company to show that the relative profitability of the Swedish business is scaling up to validate the relevance of the international growth strategy.

The market no longer gives value to Indoor

Our sum-of-the-parts calculation indicates a value of EUR 0.8 per share for KH Group. We see undeniable value in KH Group's holdings and believe the value exceeds the current price level even without the agonizing Indoor. Realization of Indoor’s balance sheet risk would destroy value and limit the upside in the stock, but the parent is not responsible for Indoor’s debts (the parent has net cash from the HTJ divestment). As a result, Indoor only depresses the value of the entity if capital is poorly allocated to the company or if the difficulties in Indoor clearly takes the management’s attention away from other subsidiaries. In terms of KH-Koneet's value, proof of improved profitability in Sweden is key to the story, which we got a hint of in Q2.