KH Group Q3'25: The story is taking shape

Translation: Original published in Finnish on 11/3/2025 at 7:30 am EET.

The change of CEO at KH-Koneet and the integration of NRG into the group's strategy stole the spotlight on KH Group's earnings day. In our opinion, the decision of KH-Koneet's founder and CEO to step down from the company's operational duties is a clear setback. Although KH Group has considerable potential over the cycle, driving the turnaround and improving the quality of the Swedish business under the new CEO will raise the risk profile of the investment story, in our view. We reiterate our Reduce recommendation and revise our target price to EUR 0.50 (previously EUR 0.52). 

Good growth in continuing operations

KH Group issued a profit warning in September, meaning that the main features of the Q3 report were fairly well established. Both KH-Koneet and NRG achieved good growth, though KH-Koneet's profitability weakened year-on-year due to the decline in the Finnish machine rental business. On a positive note, the challenges faced by Swedish machine rental in Q2 seem to be in the past, though the performance of KH-Koneet's various businesses has unfortunately been volatile this year. NRG achieved cautious earnings growth, supported by increased revenue in a seasonally quiet quarter. Although Indoor Group's revenue declined sharply, the company managed to protect its profitability better than expected, improving relative profitability from the comparison period with recovered gross margins and efficiency measures.

Earnings day came with surprises

KH Group's earnings day brought two key surprises: 1) KH-Koneet's founder and CEO, Teppo Sakari, has decided to step down from his operational role in the company and 2) NRG will be integrated into the group's strategy. We have described Sakari as a key person for KH-Koneet, and now the risk associated with this key person is materializing at a very difficult time. Amid a challenging economic cycle, KH-Koneet's profitability is under pressure, and despite its good size, the Swedish machine dealership is not yet creating value. We assess that incorporating NRG into the strategy means, in practice, that the KH Group will no longer actively seek to sell the company. We assume that the views of the KH Group and potential buyers on NRG's value simply do not coincide, leading to this decision. NRG's financial performance is strong, it has a healthy order book, and the KH Group has no urgent need to sell the company. In this context, holding on to the company seems like a better option than selling at a low price, even though the erratic strategy undermines its credibility.

Big-picture forecasts unchanged

Our estimate changes for the next few years are minimal. We see significant earnings growth potential at KH-Koneet, supported by the cyclical recovery of the construction sector. While the Finnish business is clearly value-creating in our books, KH-Koneet needs to improve the profitability of its machine dealership in Sweden for growth abroad to be value-creating. With the upcoming change in CEO, we believe the associated risk has increased. As in the current year, we expect NRG to perform very strongly in 2026, after which profitability will moderate and be pushed closer to historical levels in our forecasts as demand normalizes. For NRG, we believe that the company's ability to grow in export markets is essential when considering its future, over-cycle normalized profitability.

Horizon of valuation is too distant

Based on our current year’s estimates, KH Group's EV/EBIT multiple is very high at 20x, and even with our forecasts accounting for a significant earnings improvement next year, it remains high at 14x. However, due to KH Group's relatively low profitability and significant financial leverage, an earnings-based valuation is sensitive to even small changes in forecasts. Our DCF model, which indicates longer-term potential, implies a value of EUR 0.51 per share for the group. However, the model relies on sustainable profitability improvements.