Componenta Q1 on Tuesday: 2024 off to a slow start

Translation: Original comment published in Finnish on 5/3/2024 at 7:22 am EEST.

Componenta will publish its Q1 business review on Tuesday at 8:00 am EEST. There are more uncertainties than usual about volume and earnings trends in the first quarter, and the risks to our forecast are on the downside. The loose 2024 guidance is likely to be reiterated. The valuation of the stock is cheap.

Significant decline in Q1 revenue already indicated

There is no meaningful consensus forecast for Componenta. We forecast Q1 revenue to fall sharply (-21% y/y) from Q1'23, which was an exceptionally strong comparison period. Componenta stated in its Q4'23 report (March 1) that the lower order book and volume levels of Q4 had continued in Q1 and that some customers had faced factory shutdowns, but that an improvement in the order book was expected from week 10 (March 4). For the companies we consider likely or at least potential customers of Componenta (e.g. AGCO's tractor manufacturing, Cargotec, KONE, Konecranes, Metso, Wärtsilä, Ponsse) Q1'24 equipment sales were 9% year-on-year at the median level. However, this decrease was already reflected in Componenta’s Q4’23 revenue, which fell by 28% year-on-year. An additional parameter for Componenta's Q1 revenue is the ramp-up of new products for mass production, which already started in Q4 and the volume and rate of which is difficult to estimate. On the negative side, we believe that the port strikes did not have a major impact on Componenta's procurement and only to a limited extent on customer deliveries.

Low volumes weighed on Q1 profitability

We expect Componenta's profitability in Q1 to have been low (EBITDA margin of 5.4%) due to low volumes and consequently low capacity utilization, as well as the additional costs resulting from the above mentioned ramp-up. Port strikes may also have led to additional costs, for example due to alternative transport routes. Among the production factors, prices for pig iron, scrap and electricity have been relatively calm and are therefore not expected to have a significant impact on earnings. In addition, almost all of Componenta's supply contracts contain price clauses related to the market prices of raw materials and energy, so that the company is fairly well protected against these cost risks. The situation is different for wage inflation, and we would like more information from the company on this. Due to lower revenue, the EBIT margin in the first quarter is expected to be negative (-0.9%) compared to 4.5% in the prior year. Our expectation for net financing expenses is -0.4 MEUR, and the use of deductible losses keeps the tax rate at zero. Componenta's income statement in the business review is only presented at a summary level, so it is not possible to examine the cost structure in more detail. In any case, the risks to profitability are on the downside. 

2024 expectations are weighted towards H2

Componenta has guided for an improvement in net sales and EBITDA in 2024 compared to 2023. However, the benchmark is low as H2'23 was very weak. At that time, Componenta's revenue was down 24% year-on-year and its EBITDA margin was negative at -0.3%. We hope, but do not expect, a clarification of the 2024 guidance. Componenta has reported that it has systematically increased its market share and has indicated significant volume growth for 2024. The focus will be on H2'24. This is in line with Inderes' forecasts for the (hypothetical) client companies mentioned above. We expect these companies' equipment sales to turn around to a median of 2-3% year-on-year growth in H2'24 after a sluggish H1'24 and the end of destocking in the distribution chain. However, there are major differences between the companies.

Based on the table above, we expect full year 2024 revenue growth of 4% year-on-year and an EBITDA margin of 8.1% (2023: 5.2%). For H2'24, our revenue growth forecast is 34% year-on-year and our EBITDA margin expectation is 9.4%. Overall, our forecasts for 2024 rely heavily on Componenta's customers' increasing production plans towards H2'24 and Componenta's growing market share. We expect the company to comment on these issues in the business review.

Affordable pricing

The total expected return on Componenta's share exceeds the required return by a wide margin using EV/EBITDA-based calculations for 2024-2025. For example, using 2025 figures, the total return is +29% p.a. (price potential +25% and dividend yield +4%), which is well above the 12% ROE requirement. Calculations based on EV/EBIT or P/E ratios paint an overly negative picture of the potential return, as these ratios are currently subject to significant leverage. This is due to Componenta’s temporarily disproportionately low EBIT and EPS ratios compared to EBITDA. Relative valuation multiples are skewed by the same factors. Thus, the EV/EBITDA ratio for 2024 is significantly undervalued by -52% compared to the peer median, but the EV/EBIT is only -11% and the P/E ratio already indicates a clear premium valuation. At 2025 valuation multiples, the stock trades at a discount of at least -24% to -57% to its peers in all cases. The DCF model indicates a +44% upside for Componenta’s share. Overall, the stock is priced cheaply.