Purmo Q2'24: We believe the company will go to Haier

Haier, which has made a competing bid for Purmo, appears to be winning the tender and we expect the bid to be completed according to Haier's estimate, i.e. Q4'24-Q1'25. We reiterate our target price of EUR 13.5 in line with Haier's tender offer (adjusted for dividends). The lower share price offers a reasonable return expectation if Haier's offer materializes, as we believe it will, so we raise our recommendation to Accumulate (was Reduce). 

Haier to win the tender

Grand Bidco (a consortium of private equity investor Apollo and Rettig, Purmo's majority owner), which had offered EUR 11.15 per share for Purmo, announced earlier this week that it would not increase its offer. As a result, the offer of EUR 13.68 announced on Monday by the Chinese company Haier is significantly higher and therefore more attractive. The Grand Bidco offer remains valid and the offer period continues until July 31st. The Grand Bidco offer is still subject to an 80% approval condition, which we do not believe will be met as the offer is below the current share price and Haier's offer. We expect the Purmo board to dissolve the merger agreement with Grand Bidco in the near future and change its recommendation to Haier's offer. We believe that Rettig, the majority owner, is also willing to sell the entire stake at the price offered by Haier and that Haier's offer will therefore be realized. Grand Bidco's initial, much lower offer had 90% of Purmo's shareholders committed, so we believe that a higher offer is very likely to be accepted. We also understand that Haier does not have any business that competes with Purmo, which could be a problem for the competition authorities. According to Haier's own announcement, financing for the deal has already been arranged. Haier expects the transaction to be completed in Q4'24 or Q1'25.

Weak Q2 result, guidance unchanged

Purmo's Q2 result was weaker than expected, as its adjusted EBITDA unexpectedly declined year-on-year and was 20% below our forecast. One of the main reasons cited by Purmo was the temporary negative impact of production plant shifts, which we believe was largely limited to Q2. Even with this, the result was still soft. However, the company repeated its loose guidance of a flat or improving result compared to last year and its view that the market is now bottoming out and should start to grow next year. We have lowered our forecasts for this year, mainly due to the weak Q2, and now expect adjusted EBITDA to settle at 94 MEUR, compared to 92 MEUR last year. Our estimates for 2025-2026 have only decreased by 1-2%.

Current share price provides reasonable return if Haier's offer is successful

Purmo's share price has fallen between the price levels of the two tender offers, indicating that the market is skeptical that Haier's bid will be successful. However, as described above, we believe that Haier's bid will be completed, and while there is always uncertainty in the tender offer process, we do not believe it is significant at this time. At the current share price, the shareholder will receive a return of around 12% if Haier's offer is successful, which it should be in about six months' time. We think this is a reasonably good expected return, even considering the risks. Haier's offer values Purmo at an EV/EBITDA multiple of around 9x based on our current year forecasts, and the offer price is well above e.g. our DCF of just over EUR 9, so we consider the offered price to be good. Despite (and partly because of) the recent strong margin improvement, we believe Purmo's earnings growth prospects over the next few years are quite moderate, which would likely keep the stock's valuation level low.