Componenta Q3'24: Stumbling but getting up again

Translation: Original published in Finnish on 11/4/2024 at 8:35 am EET.

Componenta's Q3 business review figures were below expectations across the board, with a clear miss on revenue. The company maintained its revenue and earnings guidance for 2024, so the rest of the year will be busy. Our forecast changes for 2024-2026 are downward, but quite small in euro terms. The current valuation of the stock supports a positive recommendation by almost all measures. We therefore reiterate our Accumulate recommendation. The impact of our forecast changes is reflected in a lowering of the target price to EUR 3.30 (previously EUR 3.60). 

Volumes again lacking in Q3

Q3 revenue (+2% y/y) fell far short of our estimates. Componenta's initial expectations for future volumes were significantly higher, and customer decision-making has been characterized by delays. In particular, we believe that the difficulties experienced by AGCO/Valtra, which we expect to be Componenta's customer, have been reflected in Componenta's volumes. In addition, the development of orders from Componenta's end customers in the machine building segment has also been weaker than expected. Despite the low volumes, Componenta's EBITDA margin was at a reasonable level of 6.0%, significantly better than the EBITDA on the same revenue level in the previous year (Q3'23: 2.0%). Profitability was supported by price increases in Componenta's foundries, which were accepted by customers due to the low utilization rate of the foundries. Financing costs were well above our expectations in Q3, and that of course was reflected in EPS.

Moderate cuts in forecasts

Despite the weaknesses in the Q3 report, Componenta maintained its guidance for 2024 (revenue and EBITDA to improve from 2023). For Q4'24 this means at least 46% year-on-year revenue growth and an EBITDA margin of 6.8%. The Q4 volume outlook is built on growth in new volume products. We also believe that increased deliveries, especially to the Finnish Defence Forces and possibly also to the energy sector, will play a major role in Q4 volumes. Agricultural machinery volumes are not expected to improve until H2'25, but an upturn in mechanical engineering is already visible and projects have started in the energy sector as the need for balancing power increases. We continue to believe in Componenta's guidance for 2024, although it may be difficult to achieve, especially in terms of revenue, and the risk of a profit warning cannot be ruled out. Our revenue forecasts for 2025-2026 reflect the delay in volume growth, but growth is still driven by the integration of the Fortaco acquisition, the deal with the Defence Forces, and the energy sector. Our revenue growth forecasts for 2025 and 2026 are now +18% year-on-year (+21% y/y) and +13% year-on-year (+14% y/y), respectively. Our EBITDA margin forecasts remain nearly unchanged: 2025: 9.0% (9.0%) and 10.0% (9.8%). Profitability is supported by, among other things, the easing of the energy and raw material markets.      

Undervaluation is apparent

With the 2025 EV/EBIT calculation, the total expected return of Componenta’s share is +14% p.a., which is above the required return of 12%. With a P/E-based calculation, the total expected return is already +19% p.a. and overall, the risk-adjusted return on the share is attractive. All of Componenta's key valuation multiples for 2025 are well below the peer group median. The discount of EV/EBITDA, EV/EBIT and P/E multiples is -35...-55%, clearly more than the -20…
-30% we believe is justified. All in all, the stock is also cheaply priced on a peer basis. The DCF model indicates Componenta a share value of EUR 4.3, with an upside of +52%.