Harvia Q4'24: The profitability dip is likely to be temporary

Translation: Original published in Finnish on 02/14/2025 at 08:56 am EET

Harvia's Q4 revenue grew very strongly and faster than expected, but the result fell short of expectations and the comparison period due to, e.g., campaigns and marketing investments. However, we believe that the margin dip is temporary. We made no significant forecast changes for the coming years, but raised the medium-term growth forecast. We raise our recommendation to Reduce (was Sell) and our target price to EUR 46 (was EUR 40).

Strong growth, but weak margin in Q4

Harvia’s Q4 revenue grew by almost 30% and organically by over 20%, exceeding expectations by nearly 10 pp. Growth was driven, as usual, by regions outside Europe. North America grew by over 60%, of which roughly half was organic and the other half from the ThermaSol acquisition, and the APAC & MEA region nearly doubled its revenue. Growth was also achieved in Europe, with Northern Europe growing by 4% and Continental Europe by 7%. With the exception of Continental Europe, all regions exceeded our expectations. Despite strong revenue growth, Harvia's adj. EBIT was 8.7 MEUR, declining from the comparison period (9.6 MEUR) and also falling short of our expectations (10.3 MEUR). Harvia’s EBIT margin fell exceptionally low to around 17% (still a good level, however) and below the company’s 20% target.

This was mainly due to campaign sales in North America (e.g. Black Friday). According to the company, the margin impact of the campaigns was more negative than planned, as the cost of wood raw materials increased during H2 and the campaign prices had been locked in well in advance. We believe strengthening the market position through campaigns is a sensible solution for Harvia as such. In addition to the campaigns, Harvia continued to strengthen its organization and invest in future growth in Q4, which was reflected in significantly increased fixed costs. This was in line with expectations, but other operating expenses were clearly higher than our forecast, with personnel expenses at the expected level.

We expect strong growth for years to come

Harvia does not provide short-term guidance, but based on management's comments, the outlook remains good, especially in its strongly growing markets outside Europe. This does not only apply to the current year, but the growth trend in the sauna sector seems strong for a longer time to come. We made no significant changes to our estimates for the next few years, but we raised our medium-term growth forecasts. 

We expect Harvia to achieve its targets

Harvia updated its financial targets in spring 2024 and aims to achieve annual sales growth of 10% (including acquisitions) and an operating profit margin of over 20%. We believe that Harvia will achieve these targets, as the ThermaSol acquisition will lead to growth of around 15% p.a. in 2024-25, and in 2026-27 the organic growth rate alone will be close to the targeted 10% growth rate of our estimates. We expect almost similar growth to continue in the 2030s. As in recent years, growth will be mainly driven by non-European regions, with growth in the US supported by increased expansion in steam and infrared products. We also expect Harvia to maintain profitability well within the target level of 22-24%.

Highish valuation has been earned through strong growth and value creation

We believe that Harvia's valuation level (e.g. EV/EBIT 2025 21x, P/E 28x) is highish, although we consider the company's return on capital employed and its ability to allocate and generate cash flow excellent and that multiples will, therefore, moderate in the coming years. We believe that Harvia’s capital allocation will continue to be value-creating, and thus channeling cash either to acquisitions and/or larger dividends would support the investor's expected return. We also see Harvia as a potential acquisition target, but with the current valuation, we find it quite expensive for the buyer.