Suominen Q3'24: Internal problems hit the result

Translation: Original published in Finnish on 11/6/2024 at 8:27 pm EET.

Suominen's Q3 results were significantly below the comparison period and forecasts due to the company's operational challenges. Although the company reaffirmed its guidance for an improved full-year earnings, we significantly lowered our forecasts for this and future years. Earnings multiples for the next few years are high, and we believe the stock is priced well above current earnings levels and our expectations for the next few years. As a result, we believe that the expected return remains weak. We lower our recommendation to Sell (was Reduce) and the target price to EUR 2.0 (was EUR 2.45). 

Weak Q3 results due to operational challenges

Suominen’s revenue was up 5% from the weak comparison period, as volumes and sales prices increased. However, revenue growth was slightly below our expectations, affected by internal operational problems. The positive revenue development did not support Suominen's Q3 earnings. Adjusted EBITDA was 3.3 MEUR, thus significantly below both the comparison period (5.1 MEUR) and our forecast (6.5 MEUR). This was mainly due to the "significant operational challenges" the company faced, which, according to the company, resulted in production stoppages and additional costs. The company estimates that the impact on EBITDA was 3 MEUR. Excluding these costs, the result would have been better than last year and close to the forecast, but still weak.

Guidance for improving result unchanged, but forecasts continue to be revised downwards

Suominen reiterated its guidance for this year, i.e., it expects the comparable EBITDA for the whole year to increase (2023: 16 MEUR). Last year, the improvement based on the same wording was less than 1 MEUR and performance was weaker than expected throughout the year, and the trend is the same this year. Therefore, after a weak Q3, we have lowered our forecasts and now expect adjusted EBITDA of around 18 MEUR. As the company's earnings level remains weak and we see no clear signs of a major turnaround, we have also slashed our 2025-26 forecasts (10-20% for EBITDA). In addition, we cut our dividend forecasts significantly and no longer expect a dividend this year due to the loss-making result and the tightened balance sheet.

We still expect improvement in the coming years, but earnings remain weak

Suominen's results are weak for the third year in a row. We believe the competitive situation is tighter than before the COVID years, as the sector invested heavily in new capacity when demand was high. We believe that this is also reflected in price/margin pressure for Suominen. As Suominen's production is almost entirely in countries with higher cost levels, it is also exposed to competition from cheaper production countries. The slow turnaround that began a year ago was halted, at least temporarily, by temporary issues in the third quarter. However, we expect earnings to gradually improve in the coming years.

The stock is pricing in a significant earnings improvement; we believe the expected return remains weak

We see a normal profit level for Suominen at 15-20 MEUR in EBIT (previously 20 MEUR), which we believe will not be reached until 2027. The company's earnings multiples are high for the next few years and at our acceptable multiples through 2027, so we see earnings growth of 2024-26 going into digesting the multiples. Considering the limited competitive advantages, we do not believe that the company will be able to achieve a return on capital that is sustainably above the required return in the long term, and thus the P/B ratio should be ~1x, so the 1.2x of 2025 also seems high. With trimmed dividend forecasts, the dividend does not significantly support the expected return, which therefore remains weak in our view.