Translation: Original published in Finnish on 1/15/2025 at 7:45 pm EET. HKFoods' upward trend in 2024 came to a great conclusion with a strong Q4 result. Strong earnings growth also supports the outlook for the coming years and, in a positive scenario, could accelerate the repayment of the hybrid bond and the start of dividend payments. The earnings-based valuation of the stock is close to fair value. However, we see even cheaper and more predictable companies in the industry in relation to earnings, so we maintain our Reduce recommendation on HKFoods and raise our target price to EUR 1.0 (was EUR 0.85). 2024 ended on a strong note HKFoods announced on Wednesday, January 15 at 4:45 pm (EET) that it will raise its earnings forecast for 2024. Comparable EBIT from continuing operations for 2024 is now estimated to be 27-28 MEUR, compared to the previous guidance of 22-25 MEUR. The midpoint of the new guidance range is now 17% higher than before. The guidance indicates that Q4 EBIT has multiplied from a weak comparison period to approximately 10 MEUR (Q4’23: 3 MEUR). The company cited production efficiencies, commercial success and, in particular, a strong holiday season as reasons for raising guidance. We assume the decline in inflation to have had a modestly positive impact on consumer spending in the end of 2024. At the same time, cost pressures in the meat sector were lower than in the past, for example due to lower feed prices, which should have supported industry margins. Still difficult to gauge a sustainable performance level We raised our adjusted EBIT forecasts by 16% for 2024 and by 8-11% for 2025-26. The strong earnings position at the end of 2024 supports the earnings outlook for 2025, but we still find it challenging to forecast long-term sustainable earnings given the volatile historical performance. Positive drivers for 2025 include at least the improvement in production efficiency (a significant positive turnaround started in mid-2024), a favorable cost environment and a small positive turnaround in Finland's economic growth, which could also support consumer spending. The start of poultry exports to China could also be a positive driver, allowing for a higher processing margin in poultry handling. Possible negative drivers could include high wage inflation, accelerating price pressure from retail chains, Chinese restrictions on EU pork imports, and changes in the cost of raw materials and other inputs. HKFoods’ profitability has historically been well below current levels and volatile, which contributes to our cautious outlook and explains why we do not forecast significant earnings growth in the coming years. Improved profitability bolsters dividend expectations The higher-than-expected earnings level improves the prospects for strengthening HKFoods' balance sheet and could thus support the dividend outlook for 2025-26. The improved earnings level will increase the safety margins of the balance sheet covenants, which could potentially allow the company to repay the expensive 26 MEUR hybrid loan (16% interest rate) on its balance sheet as early as 2025. Our forecasts still assume that the loan will not be repaid until 2026, as we want to see the balance sheet in 2024 after the divestments before we make any significant changes to the balance sheet forecasts. We forecast a net debt to EBITDA ratio of 2.4x and net debt of 141 MEUR at the end of 2024. In our view, the current valuation of the stock is close to fair value. The EV/EBIT ratio is just above 9x in 2024e and falls to just below 9x in 2025-26. In our view, there are Finnish food stocks that are cheaper investments and also pay a higher dividend yield. On the other hand, if HKFoods’ earnings level were to improve on a sustained basis, the value of the stock would increase significantly due to the company's high debt leverage.

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