KONE Q4'24: On the path to earnings growth

Translation: Original published in Finnish on 1/30/2025 at 11:40 pm EET

KONE’s Q4 report turned slightly positive, as the order intake and EBIT exceeded market expectations a bit. The guidance issued for this year is still quite broad but nonetheless indicates operational earnings growth. Reflecting the company's comments, we cut our short-term margin forecasts and expect margin improvement to occur later than previously anticipated, relative to the company's 2027 targets. However, we still consider the expected return consisting of our earnings growth and dividend forecasts attractive. Thus, we reiterate our Accumulate recommendation and EUR 55 target price.

The Q4 report contained no major surprises

KONE’s reported Q4 order intake (2,119 MEUR, +3%) was slightly below our forecast (+5%), but exceeded the consensus (-1%). The order increase was double-digit outside China and especially strong in Modernization. The margin of orders received, in turn, decreased slightly, pressed by China. KONE’s revenue grew by +6% driven by Service and Modernization, exceeding expectations. Adjusted EBIT in Q4 was 387 MEUR, which slightly exceeded both our and the consensus forecast. Reported earnings were depressed by -54 MEUR in items affecting comparability, mainly related to restructuring in China and expensed development costs. Thus, the reported earnings per share fell short of estimates. The dividend proposal (EUR 1.80) was in line with our estimate.

Guidance indicates operational earnings growth, we postponed expectations for a clearer margin improvement

In its 2025 guidance, KONE expects revenue to grow slightly at comparable exchange rates. KONE also expects the improvement in its adjusted EBIT margin to continue. According to the company, the key revenue drivers are the positive outlook in the Service and Modernization businesses and the strong order backlog. Correspondingly, revenue growth and improved sales mix, together with efficiency programs, support margin development. Pressure, however, continues to come from New Building Solutions in China, where volumes are still expected to decline at a double-digit pace. On the other hand, it should be noted that China’s share of revenue already decreased to 21% in Q4 (Q4’23: 25%) and the downward trend will continue in 2025. Mirroring the guidance and the company's comments, we made only minor revisions to our medium-term revenue forecasts. Instead, we believe the targeted margin improvement (2027 adj. EBIT %: 13-14%) to occur later than we had previously anticipated. We expect the company to still reach its target level with strategy-compliant measures (incl. changes to the sales mix), but especially the market situation in China and the short-term margin pressures still caused by inflation have shifted our expectations forward. We expect KONE’s revenue to grow by some 4% this year and the adjusted EBIT margin to reach 12.2% (was 12.9%).

Expected return attractive compared to the low risk level and strengthening earnings growth outlook

With our updated forecasts, the EV/EBIT ratios considering KONE’s strong balance sheet in 2025 and 2026 are approximately 18x and 16x. The corresponding P/E ratios are around 24x and 22x. As a whole, we find the multiples reasonable for a quality company, but we do not see any significant upside in the short term. Thus, the total expected return of the stock is based on the sum of high single-digit earnings growth and an annual dividend yield of approximately 4%, which we forecast for the next few years. This exceeds our required return. Our positive view is also supported by the value indicated by our DCF model that is above the current price (EUR ~56 per share).