HKFoods intiation of coverage: Fixing the home base

Focusing on Finnish business operations will enable HKFoods to reduce the debt burden in its balance sheet and support the company’s investment capacity. The profitability of continuing operations has been on a clearly improving trend since 2023, but we would still like to see more evidence about the turnaround to deem it sustainable. Arranging the financial position also still involves challenges that may delay the start of dividend payments for a few years. We initiate coverage with a Reduce recommendation and a EUR 0.65 target price.

A large Finnish meat and food company

HKFoods is a large meat and food company, currently focusing mainly on Finland, and with several well-known consumer brands. Retail is the company’s most important distribution channel, in addition to which products are sold to the foodservice channel, to industrial customers and export, e.g. to the Far East and Europe. As typical for the industry, HKFoods has a strong integration with local primary production, which supports visibility to the availability and price of raw materials. The company aims to grow into a comprehensive food company and potential growth segments include poultry, ready meals and various ready or semi-ready meal components.

Investments and efficiency measures could enable a sustainable profitability increase

The company has long suffered from a negative spiral with high debt, low investment capacity and profitability challenges. The exit from the Baltic, Swedish and Danish businesses in 2022-24 has helped reduce the debt burden and increase efficiency-enhancing investments in Finland after decades of under-investment. In 2023-24, the company has implemented savings measures and efficiency investments aimed at an annual efficiency improvement of 12 MEUR and invested in growth in semi-ready foodservice products. Profitability has recovered after the inflation challenges of 2022. We forecast that 2024 adjusted EBIT will already be 20.0 MEUR (2023 continuing operations: 11.6 MEUR). In addition to internal improvement, the profit growth is supported by the accounting-technical growth of the bacon business in Poland following the divestments in Sweden and Denmark. However, in our opinion, the sustainability of the earnings turnaround is still uncertain considering historical challenges and the tight competitive situation in the market.

High financial costs and balance sheet risk weigh on the scale

Although debt is declining both in absolute terms (2024e: net debt of 147 MEUR and hybrid loan 26 MEUR) and relative to EBITDA (net debt/EBITDA 2024e: 2.9x), we feel the company’s financial position is still subject to uncertainty. The refinancing of the 90 MEUR bond by March 2025 will at least increase financing costs. HKFoods has announced its intention to redeem a 26 MEUR hybrid loan in fall 2024, which we anticipate will extend to 2026, assuming that the company will not utilize equity-linked solutions such as a share issue, a new hybrid or treasury shares (9% of the share capital). If the profitability turnaround proves sustainable and the result improves in the coming years, as we forecast, earnings-based valuation multiples would be reasonable (2024-25: 11.5x and 8.7x). However, there is no real upside in the multiples with our current forecasts, as the 2024e EV/EBIT ratios of domestic food companies with moderate growth and higher returns on capital are around 10-11x. The purchase settlememnts of the divestments and likely improving profitability support cash flows, but so far the company cannot afford to pay dividends and a significant share of the free cash flow is spent on financing costs.