KONE Q2'24: China weakness does not change the big picture

This report is a summary translation of the report “Kiinan heikkous ei heilauta kokonaiskuvaa” published on 7/21/2024 at 11:55 pm EEST.

KONE released its Q2 report on Friday, which came in slightly below our forecasts for key operating metrics. The company updated the upper limits of the guidance range slightly downward. We have made negative revisions to our forecasts for the current year, but the revisions, which are limited to the second quarter, have reduced our full-year earnings forecasts by a modest 2%. Against this backdrop, we reiterate our EUR 50.0 target price and Accumulate recommendation

Q2 figures slightly below our expectations

KONE's Q2 orders received increased by 2% to 2,328 MEUR, slightly below our 4% growth forecast. Due to a slower-than-expected development in New Building Solutions, the company's revenues declined by approximately 1%, whereas we had expected growth of a similar magnitude. The weakness in New Building Solutions was less surprisingly related to China and the challenges in the local real estate market, while other businesses and geographic markets were broadly in line with expectations. The adjusted EBIT margin improved to 11.9% in the second quarter from 11.7% in the year-ago period, also below our guidance of 12.3%. Against this background, the adjusted EBIT for Q2 remained at 335 MEUR, below our forecast of 356 MEUR.

Weakness in China, forecast changes remain moderate

KONE slightly lowered the upper limits of the current year's guidance ranges. The company estimates that in 2024, its revenue growth will be in the range of 0 to 4% at comparable exchange rates (previously 0-5%). The adjusted EBIT margin is estimated to be 11.5-12.2% (previously 11.5-12.3%). The fine-tuning in growth guidance is, of course, related to the still sluggish development in China, where the company revised its outlook for the New Building Solutions market downward, as it did in the first quarter. The company expects a significant (>10%) decline in the market, but at the same time, thanks to the good momentum of the North American modernization market, significant growth is now expected there (previously: clear growth). In terms of profitability, the revenue mix will continue to develop positively thanks to modernization and higher margins in markets outside China. We believe these factors should support our expectations for the remainder of the year and for improved profitability in the coming years. Since the report, we have made relatively minor changes to our forecasts, limited in practice to the Q2 result. Reflecting this overall picture, our forecast for the current year is for KONE's revenue to grow by just over 2% in 2024 (was +3%), and our adjusted EBIT margin forecast is 12% (was 12.1%). Estimates for the coming years remain unchanged.

We believe there is upside in the valuation

Our projected P/E multiples for 2024-2025 are 23x and 21x, and EV/EBIT multiples reflecting the strong balance sheet are 17x and 15x. In absolute terms, we believe these valuation multiples are reasonable given the high quality of the business. The stock also trades at a slight relative discount to the median multiples of its major peers, particularly Otis. In our view, this and the DCF model, which is above the share price, continue to support a positive view on the stock.