Koskisen Q3'24: We moderated our expectations for a turnaround

Translation: Original published in Finnish on 11/18/2024 at 11:35 pm EET.

We reiterate our Reduce recommendation for Koskisen and revise our target price to EUR 7.25 (previously EUR 7.50). Koskisen's Q3 report was overall weaker than we expected, and we made negative forecast changes after the report with an emphasis on the near term. In our view, Koskisen's stock is still fairly correctly priced at the one-year horizon, given the upward curve of the result, a reasonable dividend and the expectations already built into the stock. Thus, the expected return remains at the level of the required return in our estimates. 

Operational earnings performance in Q3 improved from weak comparison figures, but clearly missed forecasts

In the Q3, characterized by summer holiday and maintenance shutdowns, Koskisen's revenue of 68 MEUR generated an adjusted EBITDA of 3.7 MEUR. Due to the very weak comparison figures,  revenue grew by as much as 22% on a volume-driven basis and adjusted EBITDA by up to 170%, driven by operating leverage. However, Q3's operational figures fell significantly short of our and consensus estimates, as profitability in the Panel Industry suffered badly, largely due to the high birch log prices. In the Sawn Timber Industry, performance was likely slightly better than expected, driven by the first efficiency gains from the Järvelä sawmill investment. We commented on the result here on Friday. 

Guidance unchanged, but downward adjustment of estimates for the Panel Industry in the short term

Koskisen reiterated its guidance for 2024 according to which revenue will grow from last year (2023: 271 MEUR revenue) and the adjusted EBITDA margin will be 8-12%. This reaffirmation of the broad guidance was to be expected. For the Sawn Timber Industry, the comments were in line with peers.  The delayed recovery in construction and the still elevated price of softwood logs indicate that the subdued operating environment will continue into next year, but the gradual realization of efficiency gains from the new Järvelä sawmill should still be a strong counterforce. In the Panel Industry, the near-term outlook was weaker than we had expected, despite the ongoing war-related supply constraints in the birch plywood segment, as the weakness in the Central European economy curbed orders in late Q3 and likely in Q4 as well. The high price of logs is a problem for the Panel Industry, at least in the current demand situation. While we made no significant changes to our near-term estimates for the Sawn Timber Industry, we lowered our estimates for the Panel Industry for Q4 and next year in terms of volumes and raw material costs. We also increased our forecasts for depreciation, which we had lowered in connection with the Q2 report, but this was a technical change. At the group level, our adjusted EBITDA forecasts were significantly reduced this year and by 3-7% in 2025-2026. We expect the company to end this year at the lower end of its profitability guidance range. In the coming years, we expect Koskisen's adjusted EBITDA to continue the upward trend that started in Q3, despite the earnings disappointment, as lower interest rates and a return of confidence gradually revive demand, especially in the construction sector and in Europe. 

Valuation more or less at the right level in our view, and expected return reflects required return

Koskisen’s 2024 and 2025 EV/EBITDA ratios that consider the strong balance sheet are around 7x and 6x and the P/B ratio is around 1.1x (2024e). The multiples are largely within the ranges we accept, taking into account the company's estimated return on capital and risk profile. The DCF value is also around the current share price level with our current conservative parameters. Thus, Koskisen's expected return based on earnings growth, falling multiples (Q3'24 LTM P/E 18x) and a dividend of around 4% is, in our view, in line with the required return over the 12-month horizon. We maintain our cautious stance on the stock, although there could be leverage in the medium term if the European construction and economic recovery were to surprise positively in the years 2025-2026.