Translation: Original published in Finnish on 12/2/2025 at 8:52 pm EET.

We see favorable earnings growth prospects for Norrhydro in the coming years in conventional hydraulic cylinders, where the company has gained market share in the long term and is now benefiting from its new modern factory. NorrDigi technologies could enable even stronger and higher-margin growth in the long term, but visibility into successful commercialization is currently uncertain. Earnings-based valuation multiples are still elevated at the current earnings level and the leveraged balance sheet increases the risk profile, but we estimate that both will develop in a more favorable direction, driven by the ongoing earnings turnaround. We reiterate our Accumulate recommendation and EUR 1.60 target price for the company.

Hydraulic cylinders for mobile work machinery

Norrhydro Group is a manufacturer of hydraulic cylinders based in Rovaniemi, Finland, whose customers include global manufacturers of material handling, forestry, excavation and rock drilling machines. The business is based on long-term customer relationships and product development carried out in cooperation with customers. Key customers operate mainly in the Baltic Sea region, but the target market for the new, more advanced NorrDigi cylinders is global. NorrDigi's global commercialization is promoted through OEM and distribution partners, which could help scale the technology with relatively light resources.

The new factory supports market share growth

We estimate the conventional cylinder market to grow by an average of approximately 4% p.a. (until 2030), and Norrhydro has historically gained market share. A new, modern factory with a higher degree of automation was completed in Rovaniemi in 2022, and it will support production efficiency and the company's market position in the future. Although fixed costs have increased with the factory, we estimate that it will enable higher profitability as volumes grow. Market demand was at a historically weak level during 2024, but has recovered significantly during 2025, supported by, for example, the material handling and mining industries, although demand for construction and forestry machinery is still weak.

Commercialization of NorrDigi technology in its early stages

In recent years, Norrhydro has invested significant resources in new, higher-value NorrDigi cylinder technologies (MCC=multi-chamber cylinder and EMA=electromechanical cylinder). The technological foundation is already complete, and in the coming years, the operational focus will be on advancing commercialization and developing customer applications in cooperation with customers and distributors. Revenue is still small, which is why we estimate NorrDigi to have a negative impact of around 1 MEUR on the Group's EBIT for the time being. In our forecasts, we have assumed NorrDigi's growth to be moderate in the coming years and to accelerate only in the medium term (2028 onwards). Visibility into demand and reaching the mass production phase is still weak.

A turnaround company involves risks, but also opportunities

We estimate Norrhydro to be in the midst of an earnings turnaround, which could help the company reduce the balance sheet risk caused by its high indebtedness (net debt/EBITDA Q3'25: 4.4x). The current year's earnings-based valuation EV/EBIT 17x is still high, but with more demanding forecasts for 2026, the multiple is already a favorable 10x. In Norrhydro's case, it is also worth noting the negative earnings impact of NorrDigi, which is in its early stages, and its later growth potential. Adjusted for NorrDigi's estimated earnings impact, EV/EBIT would be only 10x for 2025e and 8x for 2026e, so we estimate that the current share price could already be justified purely by the results of the conventional business, even if one does not believe in NorrDigi's breakthrough. Although the valuation appears attractive and we estimate the outlook to be on an upward trend, it is good to note the elevated risk level of the share, which is related to, among other things, the cyclicality of the industry, dependence on certain customers, indebtedness, and the difficult predictability of NorrDigi's breakthrough.