LapWall H1 on Tuesday: Guidance should indicate an improving trend for H2

Translation: Original comment published in Finnish on 8/4/2023 at 7:29 am EEST.

LapWall will publish its H1 report on Tuesday. The company is building on reasonable Q1 figures given the market situation and we expect the company to have managed to defend its profitability moderately in Q2 as well. However, LapWall has no way of meeting the very strong levels of the comparison period, as the brisk decline in revenue driven by the wall element segment, which is linked to residential construction, is weighing on the bottom line. LapWall has promised to provide earnings guidance in its H1 report, which should probably be in line with our estimate of an adjusted EBIT of EUR 5 million this year to avoid any major surprises. Our extensive report on the company, published in May, is available here.

We expect Q2 to be on track with Q1

LapWall's revenue plummeted by more than 20% in Q1 due to a decline in the order book in the wall element segment driven by residential construction, although demand in the roof element segment driven by public and industrial construction has been healthy. In addition, the company's sales prices have probably also fallen, partly reflecting weaker demand and lower costs for certain raw materials (incl. sawn timber). We expect the same trends to continue in Q2 and expect the company's revenue to fall by 24% in H1 to EUR 19 million. Our estimate includes marginal inorganic growth from the acquisition of KW-Components, which has been included in LapWall figures since the beginning of June.

We forecast LapWall's adjusted EBIT for H1 to be around EUR 2.1 million. As a result, LapWall's decline from the strong comparison period significant, but our estimate would correspond to an adjusted EBIT margin of 11%, which would be good for the company given the difficult market conditions in the construction sector as a whole. In practice, our estimate expects Q2 to have been slightly weaker for LapWall than Q1, mainly due to low price pressure and the acquisition of KW-Components. In the lower lines, EBIT is burdened by small group goodwill amortization (we treat this as an adjustment item). We have not included any other adjustment items in our estimates, although small one-off costs related to the acquisition of KW-Components would not be a surprise. We forecast LapWall's financing costs to be low in H1 and the tax rate to have settled at its normal level of just over 20%. As such, our estimate for adjusted EPS is almost half below the comparison period at EUR 0.11, mirroring the drop in EBIT. Even on a cash flow basis, H1 figures can be even weaker than earnings, as the company's working capital is negative, which of course dampens cash flow as revenue falls.

Guidance should be able to indicate an improvement in performance by H2

LapWall has said it will seek to provide guidance for the current year in its H1 report. Like last year, we expect the company to provide numerical ranges for the current year's revenue and adjusted EBIT in the report. In terms of the operating environment, the situation has not changed and the gloomy housing construction market, especially due to rising interest rates, will continue to weigh on the company in H2. However, LapWall received a nice amount of new business in the roof element segment during the early summer, and we estimate that new orders rose to a level well above Q2 sales and to their highest level since Q1'22 (including the delivery of roof elements from Metsä Wood's new LVL mill, which still includes a demolition option). Given the turnaround in order book and the inorganic support for H2 provided by KW-Components, we believe LapWall should have the potential to outperform H1 in H2. Our estimate for the company's full-year revenue is EUR 45 million and for adjusted EBIT EUR 5 million. In our view, the guidance ranges should be broadly in line with our estimates, so as not to cause major market surprises one way or the other.