Kreate Q2'24: Improving profitability at the right time

We reiterate our target price (EUR 8.50) and our Accumulate recommendation for Kreate after the company’s Q2 report. Kreate's second quarter was promising in terms of both profitability and outlook. Profitability improved for the third consecutive quarter, while at the same time the market outlook for the different business areas has improved. Overall, the report did not lead to any significant changes in our forecasts. The valuation of the stock is moderate relative to the earnings improvement in the coming years, and the expected return is further supported by the strong dividend yield of 6%.

Profitability improved in the first half of the year

On Tuesday morning, Kreate published its Q2 report, which was better than expected. Revenue was still clearly down at 21% (Q2: 68 MEUR), but profitability was significantly improved beyond our expectations. EBITA was at the level of the comparison period at 2.6 MEUR (forecast: 2.2 MEUR) and the margin improved to 3.8% from 3.0% in the comparison period (forecast: 3.0%). Kreate has clearly managed to reverse its earnings trend at just the right time, as the infrastructure market seems to be picking up, especially in the demanding infrastructure sector where Kreate specializes. However, the order book was still down 24% from the comparison period at 200 MEUR. The level is still good by historical standards and the revenue recognition of the order book will also be stronger this year than in the past.

Market outlook in favor of better H2

As expected, Kreate’s guidance remained unchanged. According to Kreate’s guidance, revenue will decrease and amount to 270-300 MEUR in 2024 (2023: 320 MEUR). EBITA is expected to grow to 8-11 MEUR (2023: 7.8 MEUR). Much remains to be done in the second half of the year, but H2 can be expected to be better than H1 this year, as both the outlook and the order intake have taken a turn for the better. Our projections are below the midpoint of the guidance, but with a good accumulation of projects, Kreate has the potential to reach the upper end of the guidance. We forecast revenue to decline by 14% to 275 MEUR this year, but EBITA to increase to 9.2 MEUR (EBITA-%: 3.3%). Profitability will be supported in particular by the completion of old projects and project selectivity. Kreate is currently focused on improving its profitability and we forecast revenue to remain below the peak in 2023 (320 MEUR) in the coming years (2026e: 305 MEUR). We expect easing cost pressures, a better order book and higher volumes in 2025-2026 to bring profitability closer to Kreate's normalized level of 4% (2026e: EBITA-%: 3.9%). Targets are even higher (>5% EBITA), but inflationary developments (materials and wages) and the weakness of other construction (increased competition in infrastructure) still pose risks.

Moderate valuation and expected return supported by dividend

We forecast an increase in Kreate's earnings in 2024 and relative to that, the stock is priced at a reasonably neutral level (24e: EV/EBIT: 10x, P/E: 14x). An improving market and a positive earnings trend will bring Kreate's result back closer to normal in 2025, bringing the valuation down to a more attractive level (25e: EV/EBIT: 9x, P/E: 11x). At the mid-point of our acceptable valuation range (EV/EBIT: 10-12x, P/E: 10-12x) and based on the 2025 valuation, the stock would have upside of around 10%. The expected return is also clearly supported by a dividend yield of around 6-7%, underpinned by the strong cash flow provided by the business model. The DCF calculation is significantly higher (EUR 10.5), too, which supports our positive recommendation.