Harvia...Harvia in brief Harvia is one of the world’s leading manufacturers of sauna and spa...
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Harvia Initiation of coverage 6/2018
Transcript of Harvia...Harvia in brief Harvia is one of the world’s leading manufacturers of sauna and spa...
HarviaInitiation of coverage
6/2018
We start coverage of Harvia with an accumulate recommendation and a target price of EUR 6.5. Harvia is the pioneer of the steadily developing and growing global sauna and spa markets. The company’s dominant market position and excellent financial development are based on a strong market, product development and production know-how that have been generated through the company’s long history, on an efficient business model, extensive product portfolio and distribution network, as well as on the leading brand in the industry. Considering the stable growth outlook, excellent profitability and effective use of capital, we find the valuation level of the share to be attractive.
Leading company on the stable sauna and spa market
Harvia is the third largest player globally on the EUR 2.7 billion sauna and spa market and the market leader on the EUR 380 million sauna heater and sauna component market. The product range of Harviathat was established in the 1950s covers three sauna types: traditional saunas, steam saunas and infrared saunas. The company also offers selected sauna heater and sauna maintenance and installation services in Finland. The sauna and spa market has historically been a very cyclically stable industry due to the big replacement demand formed by the large number of saunas. The replacement demand forms around 60 to 80% of the market depending on the segment. The industry is growing at an annual rate of some 5% supported by the expanding sauna culture, improved quality of saunas and the wellbeing trend.
Harvia combines stable growth outlook with strong profitability and capital efficiency
Over the past decade, Harvia’s revenue has grown at the same rate as the sauna markets on average supported by acquisitions, product portfolio development and distribution channel expansion. The company’s profitability is among the best in the industry and the EBIT margin has remained stable at around 20%. The main drivers for the high profitability are Harvia’s efficient and well-automated production process, flexible operational business model, strong distribution relationships and the company’s well-known brand. The company's business is also very capital effective due to low investment needs, efficient and modern production facilities and a flexible production model, which enables a strong dividend flow. We believe Harvia has good earnings growth potential over the next few years through general market growth, product portfolio development, distribution channel expansion, and synergy and efficiency benefits offered by acquisitions.
The share offers good expected returns with a moderate risk level
From the investor's point of view, Harvia is a stable dividend company. In Harvia, a stable growth outlook is combined with excellent cost-efficiency and profitability, efficient use of capital, as well as strong competitive advantages that rely on the company’s know-how which together enable a stably growing dividend flow. The company's risk profile is also very moderate due to the low cyclicality of end demand, the company's strong market position and flexible business model. We expect that the around 15% overall yield of the share will over the next few years consist of around 10% annual net profit growth and a dividend yield of some 5 to 6%. The share is also supported by moderate result-based valuation compared to its peers and a DCF model that indicates a clearly higher fair value than at what it is currently valued. The P/E ratios for 2018 and 2019 based on our estimates are 16x and 14x and the corresponding EV/EBIT ratios are 12x and 11x. Based on our estimates, dividend yield in coming years will be 5.2% and 5.5%.
Pioneer of the sauna market
ACCUMULATEPrevious: -
EUR 6.5Previous: -
Share price: EUR 6.0 Potential: 8.3%
Rating and target price
Harvia Initiation of coverage June 17, 2018 at 4 pm
Analysts
Petri Kajaani
+358 50 5278680
Petri Aho
+358 50 3402986
2017 2018e 2019e 2020e
Revenue 60,1 61,4 63,5 65,9
-growth-% 20 % 2 % 3 % 4 %
EBIT excl. NRIs 10,7 11,4 12,3 13,0
-EBIT-% 18 % 19 % 19 % 20 %
Pretax profit 4,3 6,8 10,3 11,2
EPS (excl. NRIs) 0,46 0,45 0,44 0,48
DPS 0,31 0,33 0,36
-Payout ratio 8 2 % 75 % 75 %
P/E 15,8 13,6 12,4
P/E (excl NRIs). 13,4 13,6 12,4
P/B 1,6 1,6 1,5
EV/S 2,2 2,1 2,0
EV/EBITDA 10,2 9,4 8,9
EV/EBIT 11,9 11,0 10,2
Dividend yield 5,2 % 5,5 % 6,0 %
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EV/EBIT
12x2018e
Div. yield
5,2%2018e
P/E
16x2018e
MCAP
111MEUR
Stock price development Revenue and EBIT-% EPS and DPS
Source: Inderes
Value drivers Risk factors Valuation
◼ Stable market
development
◼ Leading market position
and profitability
◼ Strong cash flow and low
capex needs
◼ Improving profitability
through product mix and
efficiency
◼ Expanding reseller
network
◼ Russian market recovery
◼ Strenghtening market
position through
acquisitions
◼ High dependency on the
Muurame factory
◼ Possible changes in the
competitive field
◼ Storng fluctuation of
material costs
◼ Foreign exchange
fluctuations
◼ Economic downturn could
slow Harvia’s growth
◼ Succesful integration of
acquisitions
◼ Earnings growth potential
over the next few years is
a positive driver for the
share price
◼ Good and growing
dividend provides support
for valuation
◼ Discounted cash flow
valuation indicates upside
in the share price
◼ The share is moderately
priced both in absolute
terms and compared to its
peers
4,0
4,5
5,0
5,5
6,0
6,5
3/18
Harvia OMXHCAP
Source: Reuters
0%
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20%
25%
0
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2015 2016 2017 2018e 2019e 2020e
Revenue EBIT-%
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Contents
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Harvia in brief p. 5
Company description and business model pp. 6-12
Investment profile pp. 13-15
Industry and market overview pp. 16-18
Competitive environment pp. 19-21
Strategy and financial objectives p. 22
Financial position pp. 23-25
Estimates pp. 26-29
Valuation and recommendation pp. 30-32
Tables and appendices pp. 33-35
Disclaimer and rating history p. 36
Harvia in briefHarvia is one of the world’s leading manufacturers of sauna and spa products and the world's biggest sauna heater and sauna component manufacturer. The company’s product portfolio includes three sauna types: traditional saunas, steam saunas and infrared saunas. The company has tried to develop as wide a range of products around these as possible to cover all sauna needs both for professional and consumer use. Harvia has grown stably in history both organically and through acquisitions, and thanks to high replacement demand, the market has historically remained very cyclically stable. Harvia’s profitability has been on an excellent level thanks to effective production and a flexible operating model (EBIT % around 20%), and thanks to a low investment need, the cash flow ratio has been high.
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EUR 60.1 million (+20% vs. 2016)
REVENUE 2017
Over 60 yearsOPERATING HISTORY
3/2018IPO
EUR 10.7 million (EBIT: 18%)OPERATING PROFIT (ADJUSTED) 2017
4OWN PRODUCTION PLANTS
365AVERAGE NUMBER OF PERSONNEL
HARVIA #3ON THE EUR 2.7 BILLION SAUNA AND SPA MARKET
HARVIA #1ON THE EUR 380 MILLION SAUNA HEATER AND SAUNA COMPONENT MARKET
Source: Harvia, Inderes*Figures for 2015 to 2017 are Harvia group’s adjusted figures in accordance with IFRS standards. Figures for 2007 to 2014 are Harvia Oy’s (current Harvia Finland Oy) actual figures in accordance with FAS accounting.
Revenue and profitability 2007-2017
37,9 37,934,1
39,641,6 42,8 44,2 45,6 46,4
50,1
60,1
21%
23%
21%
24% 24%
21%22%
24%23%
20%
18%
0%
5%
10%
15%
20%
25%
30%
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70
2007 2008 2009 2010 2011 2012 2013 2014 2015* 2016* 2017*
Revenue EBIT-%
Company description and business model 1/3
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World's leading manufacturer of sauna products
During it’s over 60 year history Harvia has risen to one of the world's leading manufacturers of sauna and spa products. Measured by revenue, Harvia’sshare of the global sauna and spa market is around 2% and around 11% of the sauna heater and component market.
Until 2014, Harvia was a family owned and run company, but funds managed by the private equity investment company CapMan acquired a majority in the company in 2014 and in March 2018, the company was listed on the Helsinki Stock Exchange, which expanded the owner base considerably. The long history has resulted in considerable experience, know-how and skills in the organization, which creates a clear competitive advantage for Harvia in the relatively small and fragmented sauna and spa industry.
The company's market position has historically been particularly strong on large markets that focus on traditional sauna culture in Finland, Russia and Scandinavia, but after the Sentiotec acquisition in 2016, the company has also reached a market leader position in Germany and the aim is to expand strongly also elsewhere in Central Europe.
Harvia has long lasting customer relationships in all core areas of the sauna and spa market and its brands are best known in the industry. Harvia’sproducts are primarily sold globally through a reseller network. In 2017, Finland’s share of Harvia’s revenue was 37%, other EU countries’ 35%, Russia’s 10%, Scandinavia’s 6%, North America’s 5% and other countries’ 7%.
The company’s head office is located in Muurameand at the end of 2017, the company had 365 employees.
Profitable and capital efficient growth
Throughout its history, Harvia has grown stably (around 5% annual growth over the past 10 years) both organically and supported by acquisitions, and, at the same time, the company’s EBIT margin has remained at slightly above 20%, which is clearly among the best in the industry.
The company’s stable growth is driven by the sauna and spa markets focusing on cyclically stable replacement demand and the strengthening wellbeing trend, sauna culture expanding to new markets and a growth in average purchases. The main drivers for the high profitability are Harvia’sefficient and well-automated production process, flexible operational model, and the company’s well-known brands and products. The company's business is also very capital effective due to low investment needs, efficient and modern production facilities and a flexible production model.
In 2017, Harvia’s revenue grew by 20% from the year before particularly as a result of the Sentiotecacquisition and amounted to EUR 60.1 million (2016: EUR 50.1 million). The company’s adjusted operating profit was EUR 10.7 million (2016: EUR 10.1 million) or 18% of revenue. A strong balance sheet and cash flow offer Harvia the opportunity to make specific acquisitions in order to accelerate growth.
Products and services
Harvia’s product range tries to extensively respond to the needs of the international sauna and spa market. The company’s product portfolio covers all three sauna types: traditional saunas, steam saunas and infrared saunas. The company has built and extensive product portfolio around these from where both professional customers and consumers can find all necessary products from sauna heaters and components to a turnkey sauna delivery.
37 %
6 %35 %
10 %
5 %7 %
Geographic distribution of revenue 2017
Finland
Scandinavia
Other EU
Russia
North America
Other countries
58 %
11 %
11 %
5 %
15 %
Product distribution of revenue 2017
Sauna heaters
Control units
Sauna rooms
Steam generators
Accessories, spare partsand other
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Harvia’s products and services
Sauna heaters
Control units
Sauna rooms
Steam generators
Spare parts, services and other products
▪ Electric and wood-burning heaters▪ Heater accessories, e.g. protective railings
and walls, protective base for hearths and chimneys
▪ Control units for electric heaters, combination heaters, infrared saunas, hybrid saunas and steam generators
▪ Sauna doors, benches, panels and other structures
▪ Individual sauna interior products▪ Ready-made saunas
▪ Steam generators ▪ Steam sauna accessories, e.g. nozzles and
scent pumps
Product segment Product description
▪ Heater resistors and other spare parts▪ Heater stones, hot water tanks, sauna lights,
water pails and ladles, thermometers and sauna fragrances
▪ Infrared products▪ Sauna maintenance, installation and repair
services for consumers and corporate customers (Saunamax)
% of revenue
59%
11%
11%
5%
15%
Average growth % (2015-2017)
6%
51%
29%
5%
28%
Company description and business model 2/3The company’s product offering includes sauna heaters, saunas, control units, steam generators, as well as spare parts, services and other sauna and spa products. The company also offers selected sauna heater and sauna maintenance and installation services in Finland. Harvia has previously been profiled mainly as sauna heater manufacturer but the company aims to increase its sales clearly also in other product categories. In recent years, revenue growth has been fastest in control units, saunas and spare parts, services and other accessories.
Distribution
The group’s revenue mainly comes from product sales. Only a small proportion comes from the sauna installation sales and maintenance and repair services of Velha Oy ja Saunamax Oy. Harvia sells most of its products to retailers and distributors. Harvia’s largest customer relationship is based on the customer's group level framework agreement under which the individual order agreements made by the group formed some 17% of the group’s revenue in 2017. Harvia’s resale channels can vary considerably depending on the characteristics of different geographical areas. They can, however, be divided into four main groups:
1. Retail and wholesale trade (incl. online stores)
2. Integrators and sauna builders
3. Construction companies
4. Direct sales
Harvia’s products are distributed globally through a reseller network. The largest customer group is retailers and wholesalers who sell the company’s products to builders and end
customers. Around one-half of Harvia’s total sales is to retail customers that typically are construction material stores and chains.
Around one-third of sales is to wholesalers. The wholesalers can be electricity and HVAC wholesalers, bathroom equipment wholesalers or wholesalers that specialize in saunas.
Sauna builders and integrators are an important customer group on markets that focus on turnkey sauna solutions, like Central Europe and North America.
In the Nordic countries, construction firms that install saunas in new residential buildings are also important.
The company has selective targeted direct sales especially in Finland and elsewhere in Europe to end customers, such as hotels and gym chains.
Production
Components and raw materials
The components and raw materials that Harvianeeds are electronics and electrical components like control units and heating elements, steel and other metal materials, which are needed especially in sauna heater manufacturing, as well as the wood needed to build saunas. In addition, the company acquires wood-burning heaters and heater frames from a Russian contract manufacturer, as well as various sauna accessories from other third parties. The company has many alternative suppliers and purchases are typically made on an order-by-order basis.
Production plants
Harvia has four own production plants that are located in Finland, China, Estonia and Romania.
The main production plant is located in Finland in Muurame where a majority of the company’s sauna heaters are manufactured. In 2017, over 70,000 electric heaters and more than 35,000 wood-burning heaters were manufactured at the Muurame plant. According to the company, the capacity of the Muurame plant can be raised considerably without additional investments simply by increasing the number of employees and adding shifts in certain production cells.
In China, the company mainly produces cheaper electric heater models to be delivered to Europe but also to some extent for the Asian markets. Steam generators for steam bath use are also manufactured in China. According to the company, some 34,000 sauna heaters are manufactured annually in China. The production plant in Romania became part of the company through the 2016 Sentiotec acquisition. Lower price class sauna rooms are primarily produced in Romania. In addition, sauna products are produced and infrared radiators and wiring harnesses are assembled here. The company produces components for steam rooms, heatedloungers and bench profiles for spas and shower rooms.
Other offices
In addition to the production plant, Muuramealso houses the company’s finance, sales, marketing, export, sauna design and product development departments. The company has a sales and customer service office, as well as a logistics center in Austria. Harvia has a contract partner in Russia that manufactures wood-burning heaters for the Russian market, some 5,000 per years and frameworks for wood-burning heaters for the Muurame plant.
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Customers and distribution channels
Wholesale and retail trade
Integrators / sauna builders
Construction firms
Direct sales
▪ Around one-half of the company’s sales is to retail trade customers
▪ Around one-third of the company’s sales is to wholesalers▪ Retailers are typically construction material stores▪ Wholesalers are typically electricity and HVAC wholesalers▪ Important channel especially in Finland and Sweden
▪ Around one-sixth of the company's total sales is directed at sauna builders and assemblers
▪ An important customer group on markets that focus on turnkey sauna solutions like Central Europe and North America
▪ Sauna builders carry out the construction for the end user
▪ In the Nordic countries, the company’s products are also sold to construction firms that install saunas in new residential buildings
▪ Construction firms purchase either individual sauna components or whole saunas
Distribution channel
▪ The company has selective targeted direct sales especially in Finland and elsewhere in Europe to end customers, such as hotels and gym chains
% of revenue
~80%
~16%
~3%
~1%
Example customers*Nature of the distribution channel
*According to Harvia, the combined share of the company’s five largest customers of its revenue was around 32% in the 2017 financial period.The most important single customer formed 17% of revenue. This is a key customer relationship for the company and it has continued for over 30 years.
Harvia’s production plants and offices
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Vyborg, Russia
▪ Harvia has a contract partner in Russia that manufactures wood-burning heaters for the Russian market and frameworks for wood-burning heaters for the Muurame plant
▪ Manufactures some 5,000 wood-burning heaters per year
Tartu, Estonia
▪ Main products: steam sauna and spa components and their installation services
Canton, China
▪ Main products: cheaper electric heater models and steam generators
▪ Manufactures some 34,000 heaters per year
Gheorgheni, Romania
▪ Main products: sauna rooms, assembly of infrared elements and sensors, accessories
▪ Production plant was transferred to Harvia in connection with the Sentiotec acquisition at the end of 2016.
Regau, Austria
▪ Central European logistics center, and sales and customer service office
▪ Main products: sauna heaters, sauna rooms, control units and accessories
Muurame, Finland
▪ Harvia’s head office▪ Own product development and testing
unit▪ Own production and custom tools /
design & tool shop▪ Logistics center▪ Main products: traditional sauna heaters
and sauna rooms, benches and sauna interior products
▪ Manufactured over 70,000 sauna heaters and more than 35,000 wood-burning heaters in 2017
▪ Possible to increase capacity considerably without additional investments
Company description and business model 3/3Seasonal variation quite moderate
The seasonal variations in Harvia’s business are quite moderate even though a majority of the distribution chains’ orders typically focus on the 1st and 4th quarter. A majority of orders from Northern Europe are typically made in the first quarter, while the order activity of Central Europe focuses on the end of the year. However, fluctuations and shifts in large customers’ purchase volumes may cause considerable revenue fluctuation by quarter (e.g. customers’ campaigns or timing of deliveries of large stock orders).
The risk profile of Harvia’s business model is moderate as a whole
The risk profile of Harvia’s business model is, according to our view, very moderate as a whole. The risk level of the business model decreases especially thanks to the moderate share of cyclical income in end demand, long and extensively dispersed distribution relations, flexible production model, as well as strong operational cash flow and low capital intensity. The risk level of the business model is slightly raised by the considerable pricing power and concentration of the distribution channels in some cases, exchange rate fluctuations and high dependency on the Muurame plant.
High share of easily predictable revenues
Around 60 to 80% of Harvia’s product demand is created by stable and easily predictable replacement demand. The demand share of new sauna and spa solutions that fluctuate slightly more alongside construction and economic cycles has decreased clearly and primarily shifted to new market areas. In addition, the
share of project deliveries in revenue is quite low and the company is very selective in its project deliveries.
Based on its efficient production model and strong brand, Harvia has good pricing power
Harvia’s brand has a strong market position and reputation in its own areas of specialization and, in particular, in the traditional market areas of the sauna and spa markets. The company’s efficient product development and production process enables competitive pricing for Harvia's products especially in volume products, in addition to which, the extensive product selection makes the company an attractive partner.
Very flexible and scalable production model
Harvia has four own production plants, in addition to which the company has a contract manufacturing partner in Russia. The company's cost effectiveness is promoted by a significant share of production plant employees being covered by tailor made pay for performance agreements which increase the flexibility of production and the profitability of manufacturing work. Harvia has also centralized the production of different products (and price categories) to particular production plants with in-house designed and manufactured special tools for producing the products in question. Centralization of certain product categories to different plants also makes the availability of raw materials and components more efficient and optimizes purchase costs.
Strong operational cash flow and low investment need
Harvia’s operational cash flow is typically very
strong. The company's EBIT margin has historically remained at an excellent level of 20% and due to the structure of the production, the annual investment need is relatively low. The company has modern production plants and their current capacity can be raised considerably without additional investments simply by increasing the number of employees and adding shifts in certain production stages. The low capital intensity of the production is, in our opinion, also a crucial factor that makes the risk profile of Harvia’s business model low.
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Risk profile of the business model
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Re
ve
nu
e
2
Pro
fita
bilit
y
3
Ca
sh f
low
Risk profile of the business model
Marketcyclicality
Revenuecontinuity
Structural trends
Pricingpower
Scalability of costs
Operational cash flow
Capital intensity
Low risk level High risk level
1
1
1
2
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3
3
Two-thirds of total market replacement demand
Made-to-order product, but demand through distributors stable and easy to predict.
Strengthening wellbeing trend, sauna culture gaining popularity and growing size of average purchases.
Strong market position, awareness and high efficiency enable good pricing power.
Own production plants but high scalability and flexibility.
Strong operational cash flow as a result of high profitability and efficient production.
Low maintenance investments. Volumes can be raised significantly without large investments.
Source: Inderes
Inderes’ assessment of Harvia'soverall business risk
Investment profile 1/2Harvia is profiled as a stable dividend company
As an investment object, Harvia is profiled as a stable dividend company and we feel the company is clearly more profitability than growth focused. Harvia combines low cyclicality, excellent cost-effectiveness and profitability with efficient capital use, which together enable a good dividend flow. The risk profile is also modest since the owners do not have to bear considerable risks related to the success of growth projects or investments as the company has a strong and stable market position on its core markets, efficient and modern production and strong competitive advantages that lean on its own know-how.
Harvia has good preconditions to continue its moderate growth by strengthening its market position on the current markets, develop its product portfolio and distribution network, and expanding in the value chain. The profitable business model and the wider financial flexibility enabled by the IPO also create preconditions for acquisitions that can accelerate growth.
Potential
▪ Improving the product mix Harvia operates on the stable and growing sauna and spa market. The company has traditionally been strongly profiled as a "sauna heater company” but Harvia’s aim is to focus increasingly on a wider product selection on the sauna and spa markets. These include, for example, more advance higher price class sauna heaters and control units, as well as more extensive turnkey sauna solutions. In addition, Harvia tries to increase the size of average purchases by offering other accessories to go with the sauna heater. The company is also trying to selectively expand
its turnkey deliveries to increase the value of average purchases.
▪ Geographical expansion The core of Harvia’sgeographical expansion is strengthening the reseller network and improving the availability and visibility of product solutions tailored for each market area. After the Sentiotecacquisition, the company is, according to our estimate, able to utilize Sentiotec’s existing distribution channels in Central Europe and cross-sell the product selection of both brands to a wider area. Harvia's efficient and flexible production, strong financial position and the increasing recognition and credibility as a result of the IPO give good preconditions to gain new distribution channels in various geographic areas.
▪ Increasing efficiency Harvia is already among the best in the industry measured by profitability and the efficiency, and flexibility of its production is one of Harvia’scompetitive advantages. The company can, however, according to our view, improve its efficiency further, for example, by optimizing its product selection and the geographical structure of production, as well as by increasing its capacity utilization rate and automation at its plants.
▪ Recovery of the Russian markets The Russian markets have faced challenging times in the past few years. Harvia’s revenue in Russia in 2017 was EUR 6.2 million, while, according to the company, it has been nearly double a couple of years earlier. Tight price competition has prevailed on the Russian markets as a result of weak economic development, devaluation of the ruble and consumers’ weakening purchasing power,
which has had a negative effect on Harvia’ssales volume. The company has improved its competitiveness in Russia by partially moving to the production of a local contract manufacturer and establishing a local sales company. Harvia’s aim is to expand its operations in Russia also to regional centers, as currently, the company mainly operates only in the country's biggest cities. We consider Russia’s stabilizing economy and currency, as well as Harvia’s improved competitiveness on the Russian markets a potential growth card for the entire group.
▪ Complementing acquisition Harvia is operating on the very fragmented sauna and spa markets where the four largest suppliers have a combined market share of around 10%. In 2016, Harvia expanded its operations to Central Europe through the Sentiotecacquisition and we find it highly possible that the company continues making complementing acquisitions, for example, from the viewpoint of taking over new attractive product categories or geographical areas.
Risks
▪ Dependency on the Muurame plant We feel one of the biggest risks for Harvia is its dependency on the Muurame plant. The Muurame plant is key in the company’s business. A majority of the company’s sauna heaters are manufactured at the plant and the company’s main warehouse is located in Muurame. If these premises were damaged it would be virtually impossible for the company to quickly find alternative production premises and this could have a crucial negative effect on Harvia’s business.
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Investment profile 2/2▪ Changes in the competitive dynamic
Harvia’s strong market position and high profitability are based on a well-oiled efficient business model and long-term customer relationships that stem from the company’s long history. The market is highly fragmented and Harvia is the largest player in its own narrow sauna heater and component market with a revenue of around EUR 60 million. In our view, one factor that protects Harvia’s good profitability is that the global sauna heater and component market is too small to attract strong global electronic/appliance industry players (e.g. Panasonic, LG, Samsung, etc.) to the markets. A change in this competitive dynamic, for example, aggressive entrance into the market by a new player could tighten the competition considerably and harm Harvia’s margins.
▪ Steep rise in material and purchasing costsHarvia’s product and material costs have historically been around 40% of revenue. For example, electronic and electrical components, and steel and other metallic materials needed in sauna heater production, as well as wood and glass needed in sauna structures, are crucial for production. A clear rise in the market prices of these materials could hurt the company's profitability unless Harvia is able to transfer the cost increase of materials forward to its own selling prices.
▪ Foreign exchange rate fluctuations Harvia trades in various currencies the most important one being the euro, Russian ruble and the US dollar. In 2017, EUR 6.3 million of the company’s EUR 60 million revenue was generated in Russian rubles, EUR 3.4 million in US dollars and EUR 0.6 million in Chinese
renminbi. The company does not hedge against currency risks with foreign currency derivatives. Considerable foreign exchange rate fluctuations can subject the company to both transaction and translation risks that can affect the company's profitability.
▪ Economic fluctuations The world economy and Harvia’s main markets have fared well in recent years (excl. Russia). The GDP, consumer confidence and consumers' purchasing power have been on a growth path on nearly all of Harvia’s main markets and the company has been able to enjoy good economic cycles for several years. Harvia has, however, been able to grow organically only at an annual rate of around 4% in recent years, which is below the company’s long-term financial objective. Harvia has traditionally been able to generate good results also during economic downturns as, thanks to high replacement demand, the company’s business has been quite cyclically stable. A clear weakening in economic conditions could, however, have a negative effect on the company’s revenue and result growth outlook, which could have a detrimental effect on share price development.
▪ Acquisition risks Harvia has carried out acquisitions in recent years (e.g. the Sentiotec acquisition in 2016 and the Saunamax acquisition in 2017). We expect that the company will continue making acquisitions to accelerate its growth strategy. The prices paid for acquisitions and acquisition integration always create their own risks for the business and the acquisition targets cannot necessarily reach the objectives and
synergies expected by Harvia’s management. Continuous search for acquisition objects and realization of unexpected risks can also take time away from the management focusing on the core business, which can have a negative effect on Harvia’s profitability.
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Investment profile
Strong market position and stable profitability development
High cash flow ratio, low investment need
Stably developing and growing core markets
Continuous improvement of product mix and efficiency
Expansion into new markets
1.
2.
3.
4.
5.
▪ Improving and clarifying the product mix (SKU tracking)
▪ Geographical expansion (e.g. Sentiotec’sdistribution channels)
▪ Improving efficiency (e.g. productive and working capital)
▪ Recovery of the Russian market
▪ Complementing acquisitions
▪ High dependency on the Muurame plant
▪ Changes in competitive dynamic (threat of new aggressive challengers)
▪ Increase in material and purchasing costs
▪ Foreign exchange rate risks
▪ Economic fluctuations
▪ Risks associated with integration of acquisitions
Potential Risks
Source: Inderes
Industry and market overview 1/3Global sauna and spa market
In 2016, the global sauna and spa market amounted to some EUR 2.7 billion. Around one-half of the overall market consisted of installation, maintenance and repair services for saunas and spas. Around EUR 380 million (or 14%) consisted of sauna heaters and components. The remaining share of the market includes sauna and spa room structures, control units and other accessories. There is an estimated 15 million saunas in the world of which around 95% are used by households in detached houses, terraced houses, blocks of flats and vacation homes. In addition, saunas are in commercial use in, e.g. hotels, spas, gyms and swimming pools.
Harvia’s target markets
Harvia’s target market covers three sauna types: traditional saunas, steam saunas and infrared saunas. Traditional (electric and wood-burning) saunas are the most common sauna type and their share of the sauna stock is an estimated 68%. Especially in Russia and Finland, saunas are largely traditional saunas. Steam saunas represent an estimated 22% of the sauna stock and it is the most popular sauna type especially in Southern Europe and the Middle East. Around 11% of the sauna stock is infrared saunas. Infrared saunas are still a relatively new sauna type that is better known in Central Europe and North America.
In addition to these three sauna types the market also includes saunas equipped with so-called combination heaters where a heater that produces steam is installed in a traditional sauna, hybrid saunas (combination of traditional and infrared sauna), and steam showers.
Harvia’s target markets consist of sauna heaters
and sauna components, incl. steam generators and infrared regulators, sauna rooms, control units and other accessories. Installation, repair and maintenance work is not, in practice, part of Harvia’s core business so Harvia’s target market is considerably smaller than the above-mentioned EUR 2.7 billion overall market. After the Saunamax Oy acquisition (2/2017), the company has, however, started to selectively offer also sauna heater and sauna maintenance and installation services in Finland.
Replacing sauna heaters and other sauna components is relatively cheaper than renewing entire saunas and they are renewed more often. Of the global sauna heater and component market some 77% was replacement demand in 2016. According to Harvia’s management, a sauna heater is renewed or replaced in two to five years in commercial used and in some 10-20 years in household use. The relative effect of replacement demand and new market on sauna and spa market growth varies from region to region and market to market.
Cyclically stable market
The sauna and spa market has historically been very cyclically stable due to a high sauna stock and, in particular, due to the replacement demand formed by a dense renewal rate for sauna heaters. In 2010 to 2016, the sauna and spa market has grown at an annual rate of around 5%. According to the company's experience, sauna is part of everyday life in Finland and when the sauna heater or some other part of the sauna starts showing its age they are repaired or replaced regardless of the construction business cycle. The prevalence of saunas has a considerable effect on the development of the sauna and spa market.
16
Cyclically stable market development
Source: Study by an international management consultancy company for Harvia (2017)
50 %
14 %
36 %
Global sauna and spa market
Installation,maintenance andrepair services
Sauna heaters andcomponents
2700 MEUR
68 %
21 %
11 %
Sauna type breakdown
Traditional sauna
Steam sauna
Infrared sauna
15 M Saunas
Sauna and spa market Sauna heater and component market Construction market
Industry and market overview 2/3Replacement demand vs. new market
The share of sauna and spa replacement demand on the global EUR 2.7 billion market was around 61% in 2016. As sauna benches, other structures and equipment wears over time, saunas are estimated to be renewed every 25 to 50 years depending on the stress, and in joint commercial use more often than in household use. The share of new market for saunas and spas is an estimated 39%. The new market includes building of saunas and spas in new construction works and existing buildings.
Replacing sauna heaters and other sauna components is relatively cheaper than renewing entire saunas and they are renewed more often. Of the global sauna heater and component market worth EUR 380 million, some 77% was replacement demand in 2016. According to Harvia’s management, a sauna heater is replaced in two to five years in commercial use (hotels, gyms, spas, etc.) and in some 10-20 years in household use. The new market share for sauna heaters and other components is only 23%. The relative effect of replacement demand and new market on sauna and spa market growth varies from region to region and market to market.
Growth drivers for the market
In 2010 to 2016, the sauna and spa market has grown at an annual rate of around 5%. The sauna and spa market is estimated to grow at an average annual rate of 5% also in 2016 to 2022. The main growth drivers for the market is the replacement of old saunas, sauna heaters and components, and the new market for saunas. The main trends in recent years that affect the industry have been:
Sauna is becoming more known: How well sauna is known varies by area and it is expected to grow on emerging sauna and spa markets like North America and China. Factors that affect how well sauna is known are, e.g. increasing awareness of the health benefits related to saunas and people focusing more on wellbeing.
Development of sauna heaters, components and accessories: The development of sauna heaters and components has been fast in recent years. New, more advanced accessories have become available for sauna heaters so it is easier for consumers to buy, for example, sauna heaters that are controlled with a separate control unit. In Finland, the market is still clearly underdeveloped in this respect compared to, for example, the control units and other accessories sold with sauna heaters in Central Europe.
Growth of the average purchase: In addition to the replacement demand and new market for saunas, sauna heaters and sauna components, the growth in average purchases is estimated to effect the development of the sauna and spa market. The average purchase is affected by the price development of a similar sauna solution, switching to a better product and the expansion of the average purchase to include different accessories next to the sauna heater.
17
0,61,0
1,5
1,3
1,6
2,0
2010 2016 2022E
New market vs. replacement market (EUR billion)
Uudismarkkina Korvauskysyntä
Growth~ 5 % p.a.
New market Replacement
17
Demand on the global sauna and spa market
Replacement demand
New market Overall market
EUR 2,700 million
Demand on the global sauna heater and component market
Replacement demand
New market Overall market
EUR 380 million
Source: Study by an international management consultancy company for Harvia (2017)
Industry and market overview 3/3Biggest sauna and spa markets
Europe’s largest individual sauna and spa markets in 2016 were Russia, Finland and Sweden. These countries together covered an estimated 45% of the global sauna and spa market. The share of the rest of Europe was around 19%, Asia-Pacific some 15%, North America around 9%, the Middle East approximately 5% and the rest of the world altogether around 7%.
Finland is Harvia’s domestic market and measured with revenue, Harvia’s largest market (37% of revenue). Measured by revenue and recognition, Harvia is the leading sauna and spa company in Finland and the biggest manufacturer of sauna heaters and components. Finland has a long sauna tradition and that is why there are a lot of saunas relative to the population. It is estimated that there are around 2.3 million saunas in Finland and thanks to the large sauna stock, the new market share is low. The size of Finland’s sauna and spa market is estimated to have been some EUR 0.3 billion in 2016, which is approximately 10% of the global market.
Measured by revenue, Germany is Harvia’ssecond largest market (12% of revenue) and also the world’s second largest individual sauna and spa market. Harvia estimates that after the Sentiotec acquisition it is Germany’s largest sauna heater and component manufacturer measured by revenue ahead of EOS. Germany is estimated to have some 2.1 million saunas and the size of the sauna and spa market is estimated to have been around EUR 0.4 billion in 2016, which is approximately 15 % of the global market. The number of saunas is lower in Germany than in Finland but the euro-denominated market is
larger. This is partly due to the fact that there are relatively more saunas in commercial use and they are typically larger and better equipped.
Russia is the world’s largest individual sauna and spa market and measured by revenue, Harvia’sthird largest market (10% of the revenue). Measured by revenue, Harvia is Russia’s second largest company operating on the sauna and spa markets behind Termofor and the leading manufacturer of electrical heaters. Russia is estimated to have some 6.2 million saunas and the market size in 2016 was around EUR 0.4 billion (16% of the global market). Just like in Finland, due to the large sauna stock in Russia, the new market share of the overall market is low.
Next to Finland, Sweden is the second largest sauna and spa market in the Nordic countries and measured by revenue, Harvia’s fourth largest market. There is an estimated 0.5 million saunas in Sweden and the market size in 2016 was around EUR 0.1 billion (4 % of the global market). Harvia is Sweden’s second largest company on the sauna and spa market after TylöHelo.
The United States is Harvia’s fifth largest market. The sauna and spa market in the United States is small compared to the size of the country because saunas are not that well known. There are an estimated 0.8 million saunas in the country and the market size is estimated to be EUR 0.2 billion or 8% of the global sauna and spa market. The new market share is clearly higher than in Finland and Russia, for example, because the sauna stock is low. Measured by revenue, Harviais among the 5 to 10 largest companies operating on the sauna and spa markets in the United States.
18
1,01,2
1,4
0,4
0,5
0,6
0,2
0,4
0,7
0,2
0,2
0,3
0,1
0,1
0,2
0,1
0,2
0,2
2010 2016 2022E
Sauna and spa markets size and growth
Muu maailma
Lähi-itä
Pohjois-Amerikka
Aasia-Tyynimeri
Muu Eurooppa
Suomi, Ruotsi, Saksa jaVenäjä
Growth~ 5 p.a.
Other countries
Middle East
North America
APAC
Other Europe
Finland, Sweden, Russia, Germany
37 %
6 %35 %
10 %
5 %7 %
Distribution of Harvia’s revenue 2017
Suomi
Skandinavia
Muu EU
Venäjä
Pohjois-Amerikka
Muut maat
2017:60,1 MEUR
Finland
Scandinavia
Other EU
Russia
North America
Other countries
Competitive environment 1/2Global sauna and spa market
The global sauna and spa market is highly fragmented. The four leading actors on the market only form a market share of around 10% so their combined revenue is some EUR 270 million. The competition field consists primarily of two types of companies: 1) Sauna builders and integrators and 2) component manufacturers. The operating models of these two groups differ from each other so that the first usually do not manufacture the components they use but purchase them from manufacturers like Harvia.
The two biggest actors on the global sauna and spa market measured by revenue are integrators: the German Klafs and the Chinese SaunaKing. Klafs and SaunaKing deliver sauna solutions both for consumer and commercial use. Turnkey solutions delivered by Klafs can be found, e.g. in many European hotels, gyms and spas. Klafs offers various sauna solutions, sauna heaters and control units also for domestic use.
SaunaKing also operates in Germany through a subsidiary called Saunalux. Saunalux uses, e.g. Harvia’s and Sentiotec’s products in the sauna solutions it delivers in Germany.
Harvia is the third largest player on the global sauna and spa market with a market share of around 2%. Harvia’s approach to the market is very different than that of Klafs and SaunaKing. Harvia’s revenue mainly consists of various products (sauna heaters, steam generators, control units, spare parts, etc.), which the company distributes through different resale channels. Harvia focuses on its extensive sauna and sauna equipment selection, efficient production process and good customer relationships. The company has only after the Saunamax Oy acquisition started to offer selective repair and installation works for saunas in Finland, while previously work connected to the sauna and spa market has not been part of Harvia’s selection.
Sauna heaters and components
Some 14% or EUR 380 million of the global sauna and spa market consists of sauna heaters and components. This can be seen as Harvia’smain target market. Harvia is the world’s largest sauna heater and component manufacturer with a market share of around 11%. Harvia operates with a wide and extensive product selection on the sauna heater and component market under the Harvia and Sentiotec brands. The Sentiotecbrand became part of the company after an acquisition in 2016 and it complemented Harvia’s business portfolio both in terms of product categories (higher price range) and geographically (bigger presence in Central Europe).
The 2nd largest player on the sauna heater and component market (4th largest player in the entire sauna and spa market) is the Finnish-Swedish TylöHelo, which, like Harvia, focuses more on product manufacturing than building and repairing saunas.
19
Leading companies(10%)
Local companies(5%)
Small companies(85%)
Different types of companies and their
market shares
Number of companies
4
Around 25
Over 2,000
Annual revenue
Over EUR 50 million
EUR 5 to 15 million
Under EUR 3 million
Examples
Klafs, SaunaKing, Harvia, TylöHelo
Narvi, EOS, SaWo
Sunrans, Mondex, Misa, Stoveman
Description
▪ Integrators or large sauna component manufacturers
▪ Operations in several countries▪ Extensive sauna and sauna equipment selection
▪ Integrators, sauna component manufacturers or companies that only partially focus on saunas
▪ Typically a more restricted product selection
▪ Typically narrow product selection covering low-end and medium-priced products
▪ Also a few companies that focus on expensive products
Competitive environment 2/2Harvia’s market position
Measured by revenue, Harvia is the world's largest sauna heater and component manufacturer on a market valued around EUR 380 million (market share 11%). On the entire EUR 2.7 billion sauna and spa market, Harvia is the third largest company (market share 2%). As a whole, the market has numerous small and local players, which means, in our opinion, that Harvia through the economies of scale enabled by its bigger size can improve its position at the expense of the smaller players.
Harvia has a particularly strong market position on the developed sauna and spa markets (Finland, Sweden, Russia and Germany) and the company is the biggest or second biggest actor on all of these markets. On other viable sauna markets (e.g. North America and Asia Pacific) the company belongs to the top 5 to 10 players.
Harvia’s direct competitor is the Swedish TylöHelo that was formed when the Finnish Helo (former Saunatec) and the Swedish Tylöbrands merged in 2008 TylöHelo is the second largest player on the global sauna heater and component market with a 7% market share. In addition to the Tylö and Helo brands the company’s brands include Finnleo and Amerec. TylöHelo is extremely strong in Sweden where Harvia has stayed behind the “Volvo of the sauna market” and is the second largest actor on the market. If the company wanted to strengthen its market position in the Nordic countries we would consider TylöHelo as a potential acquisition target. TylöHelo’sprofitability is clearly lower than Harvia’s and the company’s EBIT margin has stayed slightly above zero in the last couple of years.
The Finnish EOS is the third largest player on the global sauna and sauna heater market with a market share of around 3%. EOS focuses on the premium segment in sauna heaters and components, while Harvia has traditionally been strong in the low-end and medium-priced products. After the Sentiotec acquisition, Harvia’s aim is to increase its sales in the more high-end category and in that sense, EOS will be a more serious competitor for Harvia in this category.
The Russian Termofor has focused on manufacturing wood-burning heaters mainly on the Russian markets. Termofor’s market share on the sauna heater and component market is around 3%. Sawo is a Philippine-Finnish company that manufactures sauna heaters in the Philippines and focuses on low-end and medium-priced sauna heaters and components. Measured by revenue, Sawo is the fifth largest company on the sauna and sauna heater market. The Finnish Narvi is the sixth largest player on the market (revenue close on EUR 10 million) that also sells sauna heaters under the Kota and Aito brands. Narvi is strong in Finland, especially in wood-burning heaters. Other well-known sauna manufacturers on the Finnish markets are Misa Oy and Iki-Kiuas Oy, whose revenues are around EU 2 million.
Harvia’s profitability is clearly the best among its competitors and its EBIT margin has been around 20% for the past 10 years. Over the past few years, Narvi’s result has been around zero, Misa Oy’s EBIT margin has been between 4 and 8 per cent and Iki-Kiuas Oy’s EBIT margin has been 8 to 12%.
20
82%
64%56%
23% 22%15%
Harvia Helo Narvi Tylö Misa Iki
The most popular sauna brands in Finland*
*Survey carried out by an international consulting company in Finland in 2017.
11 %
7 %
3 %3 %
8 %
68 %
Sauna heater and component market manufacturers
Harvia
TylöHelo
EOS
Termofor
Top 5-10
Muut
380 MEUR
Others
10 %5 %
85 %
Sauna and spa market manufacturers
Johtavat yhtiöt(4kpl)
Paikalliset yhtiöt(~25kpl)
Pienet yhtiöt(>2000kpl)
2700MEUR
Leadingplayers (4)
Local players(25)
Small players(>2000)
#1
#3
Competitive environmentS
au
na
he
ate
r a
nd
sa
un
a
co
mp
on
en
t m
an
ufa
ctu
rers
Inte
gra
tors
an
d s
au
na
b
uild
ers
Company Country
#1
Sauna heaters and sauna components
#2
#3
#4
#5
#6
#3
Entire sauna and spa market
#4
#7
#8
#10
#11
▪ Wide and extensive product selection under the Harvia and Sentiotec brands
Product offering
▪ Wide product selection under the Tylö, Helo, Finnleo and Amerec brands
▪ Wide premium segment sauna heater and component selection
▪ Wood-burning heaters for the Russian market
▪ Low-range and medium-priced sauna heaters and components
▪ Wood-burning heaters in Finland and Sweden under the Narvi, Kota and Aito brands
#1
#2
#5
#6
#9
▪ Wide selection of sauna solutions
▪ Wide sauna selection
▪ Company specialized in bathrooms with limited sauna selection
▪ Selection of infrared saunas
▪ Traditional saunas and steam saunas
Estimated market position
Strategy and financial objectivesStrategy
Harvia’s aim is to be the leading player on the sauna and spa product market. The company has defined the main strategic focus areas for attaining this goal as follows:
1. Increasing the value of average purchases
2. Geographical expansion
3. Improving productivity
Increasing the value of average purchasesHarvia’s aim is to sell more advanced sauna heaters and more extensive sauna solutions, as well as increase the sales of high-end products in general. The company tries to raise the value of average purchases through, e.g. upsell like offering a control unit, protective banister, sauna accessories, spare parts and heater stones with the heater. Key in increasing the value of average purchases is focusing on product development and launching new attractive products.
Harvia has traditionally had a particularly competitive product selection in low-end and medium-priced products on the company’s main markets. As a result of the Sentiotec acquisition at the end of 2016, Harvia’s selection was complemented with high-end products under the new SENTIO by Harvia brand. With this brand, the company tries to combine Harvia’s strong sauna heater and sauna know-how with Sentiotec’s high design and technology know-how. SENTIO by Harvia includes high class sauna heaters, control units and selected equipment, which will be offered on all of the company’s target markets.
As a result of the Sentiotec acquisition, Harvia’s
selection also covers more high-end control units, where the company claims good margins lie. The company can also sell control units for other sauna heaters than its own, which increases the sales potential of this product group.
Geographical expansion Harvia’s objective is to increase its market share on all of its markets in Finland, Scandinavia, Germany, other EU countries, Russia and North America. The key for attaining this objective is continuous strengthening of the reseller network and, thus, improving the availability and visibility of product solutions tailored for a particular market on all main markets.
In Central Europe, Harvia will utilize the Sentiotec acquisition by optimizing Harvia’s and Sentiotec’s distribution strategies and utilizing cross selling. In Russia, the aim is to expand into regional centers outside the biggest cities. In Scandinavia and North America, the company tries to launch products that are better suited for the market in question.
In improving productivity, the company focuses on continuously improving its operational efficiency, for example, by optimizing the geographical structure of production, increasing purchasing and logistics efficiency, optimizing the product selection, designing the products so that they are simple to produce, increasing the capacity utilization rate and increasing automation in its production plants. Harvia has a decentralized production model where different production units focus on manufacturing particular products. The company has an ongoing project to improve production and material logistics. The company also tries to continue optimizing its product selection.
Financial objectives
Harvia’s Board of Directors updated the company’s financial objectives in connection with the IPO. The company’s financial objectives are:
▪ Growth: Average annual revenue growth above 5%
▪ Profitability: Adjusted operating profit margin 20%
▪ Leverage: Net debt/adjusted EBITDA in the range of 1.5x to 2.5x
Dividend policy
The Board of Directors confirmed the dividend policy in connection with the IPO; according to which the company's objective is to pay regularly increasing dividend twice a year with a dividend payout of at least 60% of net income.
22
Financial position 1/3Stable revenue growth
In 2017, Harvia’s revenue grew by 20% from the year before and amounted to EUR 60.1 million (2016: EUR 50.1 million). Organic growth was 4%. Revenue growth came primarily from the Sentiotec acquisition that the company carried out in late 2016. In February 2017 Harvia also acquired a 56% share of the Finnish SaunamaxOy that offers repair and installation services but its revenue is not important for the group.
In 2016, Harvia’s revenue grew by 8% from 2015 and the share of organic growth was 4%. Over the past two years, Harvia’s organic growth has been a little slower than the average growth rate on the global sauna and spa market (5% per year). We estimate that this is caused by the company’s considerable exposure to slowly growing saturated markets (Finland and Scandinavia combined over 40% of revenue) and the Russian market (10% of revenue), where, in recent years, revenue growth has been hindered by the weakening of the ruble against the euro, consumers’ low purchasing power and weak growth in retail trade.
Over the past ten years (2008-2017), Harvia’saverage annual revenue growth has been around 5%, which is in line with the company's financial objectives. Revenue development has been rather stable as, thanks to high replacement demand, Harvia’s target markets are very cyclically stable. The company experienced the biggest drop in revenue in the aftermath of the financial crisis in 2009, when revenue decreased by 10%. Otherwise, the company’s revenue has grown in low single digit percentage figures until last year when the Sentiotec acquisition pushed revenue up by 20%.
Profitability among the best in the industry
Harvia's performance capacity is very stable and the profitability is among the best in the industry. Excellent profitability has continued for decades and in our view, Harvia is more profitability than growth oriented. Over the past three fiscal years (2015-2017) Harvia’s adjusted operating profit has had a very narrow range (EUR 10-11 million), which means an average adjusted EBIT margin of around 20%, which is a good level.
The adjusted EBIT margin has been on a downward trend in recent years and it has dropped from 23% (in 2015) to 18% (in 2017). The drop in the adjusted EBIT margin has been the result of the Sentiotec and Saunamax-acquisitions that brought weaker business into the group when measured by relative profitability. In addition to the relatively weaker profitability of the acquisition objects depressing the EBIT margin, strategic development projects carried out in 2016-2017, as well as IPO related costs have resulted in significant expenses. The company has treated these as expenses that affect comparability, which means that the reported EBIT margin has over the past few years been 1 to 2 percentage points lower than the adjusted EBIT margin.
According to our view, Harvia’s strong and stable profitability is based on, e.g. a predictable and stable demand structure, efficient and flexible production, relatively low labor costs compared to the industry, strong market position and brand recognition, as well as strong customer relationships in selected geographical areas.
23
20,4 20,8 22,2
6,6 6,16,2
2,9 3,13,3
11,013,9
21,41,6
2,4
3,0
3,8
3,7
4,0
2015 2016 2017
Revenue growth (organic vs. reported)
Muut maat
Pohjois-Amerikka
Muut EU-maat
Skandinavia
Venäjä
Suomi
46,4
50,1
60,14%/ 8%
4%/20%
Other countries
North America
Other EU countries
Scandinavia
Russia
Finland
10,6 10,1 10,710,69,7 9,3
22,9 %
19,4 % 15,4 %
22,9 %20,1 %
17,8 %
0%
5%
10%
15%
20%
25%
0
2
4
6
8
10
12
2015 2016 2017
Profitability
Liikevoitto (oik.) Liikevoitto (oik.)
EBIT-% EBIT-% (oik.)
EBIT
EBIT-% (excl. NRIs)
EBIT (excl. NRIs)
EBIT-%
Financial position 2/3Low capex requirements
Harvia’s annual capex need is very low and over the past three years (2015-2017) the company has invested on average EUR 1.0 million per year on both tangible and intangible assets (1.5-2.0% of revenue). The investments are maintenance investments in fixed assets to increase or develop the efficiency of production and investments in intangible assets. The company has modern production plants and in the main production plant in Muurame, the current capacity can be raised considerably without additional investments simply by increasing the number of employees and adding shifts in certain production stages.
The company has decided to make two equipment investments in the Romanian production plant totaling some EUR 270 million in 2018, which will enable, e.g. increasing the current production capacity.
In addition to these investments, the company has carried out acquisitions in recent years with which it has expanded to new market areas or product and service categories (e.g. Sentiotec in 2016 and Saunamax in 2017). We do not believe there is reason to expect that Harvia’s annual level of approximately EUR 1 million in maintenance investments would change considerably in coming years, and the company itself has indicated that an annual maintenance investment level of around EUR 1.0-1.5 million is a good rule of thumb for the company's current operating model. We do, however, consider it possible (and even likely) that the company will continue making strategic acquisitions with which it aims at, for example, improving its market position in different geographical areas and, thus, access new distribution channels.
High cash flow ratio
Due to good profitability and low investment needs, Harvia’s cash flow is strong. Harviapublishes a cash flow ratio which measures the rate of operational free cash flow to adjusted EBITDA. In 2015 to 2017, this ratio has fluctuated between 72 and 96%, which is a commendable level.
Operational free cash flow describes how much the company can generate cash flow after investments, and what its ability to pay dividends or make acquisitions is. In Harvia’scase, the strong cash flow ratio and low investment needs create good preconditions for dividend payments and we estimate that Harviawill profile as a stable dividend company that generates strong profitability. Harvia’s dividend policy is to pay increasing dividend with a payout of at least 60% of net income.
IPO strengthened balance sheet
Funds managed by the private equity investment company CapMan became the majority owner of Harvia group in 2014. In recent years, Harvia has operated with a relatively high debt leverage. At the end of 2017, Harvia’sequity ratio was 17% and it had EUR 73 million in net debt. The net debt/EBITDA ratio was very high at 5.8x. In March 2018, Harvia strengthened its capital structure with an IPO. In the IPO, the company issued 9.0 million new shares at a EUR 5.0 subscription price and collected EUR 45 million in gross proceeds. The company used the proceeds from the IPO nearly fully to repay shareholder loans and their accumulated interest.
24
1,21,0
0,7
2,0 % 2,0 %
1,5 %
0,0 %
0,5 %
1,0 %
1,5 %
2,0 %
2,5 %
0
0,2
0,4
0,6
0,8
1
1,2
1,4
2015 2016 2017
Low capex need
Investoinnit aineettomiin ja aineellisiin hyödykkeisiin(MEUR)
% liikevaihdosta
Capital expenditure MEUR (tangible and intangible assets)
% of revenue% of revenue
12,2 11,7 12,611,7 10,89,0
96% 93%
72%
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
2015 2016 2017
High cash flow ratio
Oikaistu käyttökate (MEUR)
Oper. vapaa kassavirta (MEUR)
Kassavirtasuhde (%)
EBITDA excl. NRIs (MEUR)
Free operating cash flow (MEUR)
Cash flow ratio %
Financial position 3/3Repayment of shareholder loans and rearrangement of MFI loans lowered the company’s indebtedness considerably and Harvia’s balance sheet is currently extremely strong. At the end of Q1’18, Harvia’s net debt had decreased to EUR 29.8 million (Q1’17: EUR 75.3 million). The ratio of net debt to the last 12 months adjusted EBITDA has dropped to 2.4x (Q1’17: 6.2x) and the company’s equity ratio has grown to 53.4% (Q1’17: 16.2 %)
Strong balance sheet enables inorganic growth
Harvia’s balance sheet is very strong when we take into account how quickly the company is able to generate positive cash flow with the current business. The strong balance sheet and good performance capacity enable a financial leeway to make decent sized acquisitions in the near future if the company sees opportunities to accelerate grow inorganically. The company has included both organic and inorganic growth in its 5% annual growth target in accordance with its financial objectives.
We consider it possible that Harvia is currently monitoring inorganic growth opportunities and we believe the company could well take the driver’s seat as the actor that consolidates the market. We were given a foretaste when Harviain November 2016 acquired Sentiotec to strengthen its market position in Central Europe. Sentiotec’s revenue in the fiscal year preceding the acquisition was EUR 7.4 million and Harviapaid EUR 4.5 million for the company. If suitable acquisition targets do not appear, we feel that with the current profitability, the balance sheet structure will quickly become over capitalized for the company.
25
14%16% 17%
53%
2015 2016 2017 Q1'18
Equity ratio
5,96,4
5,8
2,4
2015 2016 2017 Q1'18
Net debt/adjusted EBITDA
Estimates 1/2
26
Revenue estimates
We estimate Harvia’s revenue development mainly through the growth projections of the market areas. Harvia divides its business into the following market areas (share of revenue in 2017, %):
▪ Finland (35%)
▪ Other Nordic countries (6%)
▪ Germany (12%)
▪ Other EU countries (23%)
▪ Russia (10%)
▪ North America (5%)
▪ Other countries (7%)
The general economic growth in the geographical area, the stage of development of the sauna and spa market, Harvia’s market share and competitive position, as well as Harvia’sinvestments in the distribution channels and other sales promotion measures in the market area in question affect our revenue growth estimates. Exchange rate fluctuations also have a considerable effect on revenue development, especially in the Other Nordic countries, Russia and North America segments. Harvia’s revenue growth will, according to our estimate, suffer slightly this year due a strengthened euro and we expect revenue growth to be 2%.
Harvia aims at an average annual revenue growth of above 5%. According to the company, this includes organic and possible inorganic growth through acquisitions. We have taken into consideration only organic growth in our estimate as it is impossible to assess possible acquisitions and their timing. We do, however, consider the likelihood of acquisitions in the
next few years quite high.
According to our estimates, Harvia’s revenue will grow by an average annual rate of around 3-4% in 2018 to 2021. Revenue growth is driven by the continued growth on the global sauna market as a result of the growing wellbeing trend, increasing sauna awareness and higher average purchases.
Gross margin estimates
Harvia’s equipment and material costs have historically been on average 40% of the revenue, so the gross margin has been around 60% of the revenue. Harvia’s gross margin in 2017 was EUR 35.1 million or 58.5% of the revenue. In our estimates, the gross margin rises evenly during 2018 to 2021 closer to the company's historic level of 60%. The drivers for the higher gross margin are the company’s product portfolio moving towards a higher price category in particular through the Sentiotecacquisition and the strategic goal to increase the value of average purchases by selling, for example, a control unit, protective banister, sauna accessories and heater stones next to a sauna heater. According to the company, control units and accessories have higher margins.
Harvia is also launching a new SENTIO by Harvia brand in the high-end price category during 2018. With this brand, Harvia tries to combine the strong Harvia sauna heater brand and sauna know-how with Sentitotec’s excellent technology skills. Through high sauna heater technology and modern design the company aims for better pricing power and we believe this will have a positive effect on the gross margin.
50,1
60,1 61,463,5
65,968,2
7,9 %
20,0 %
2,2 %3,4 % 3,7 % 3,5 %
0%
5%
10%
15%
20%
25%
30%
0
10
20
30
40
50
60
70
80
2016 2017 2018e 2019e 2020e 2021e
Revenue estimates
Liikevaihto (MEUR) kasvu-%Revenue (MEUR) growth-%
29,3
35,1 36,138,1
39,941,3
58,6 % 58,5 %58,8 %
60,0 %
60,5 % 60,5 %
54%
55%
56%
57%
58%
59%
60%
61%
62%
0
5
10
15
20
25
30
35
40
45
2016 2017 2018e 2019e 2020e 2021e
Gross margin estimates
Bruttokate (MEUR) bruttokate-%Gross profit (MEUR) Gross margin-%
Estimates 2/2
27
Operating profit estimates
Over the past 10 years, Harvia’s EBIT margin has remained stable at slightly over 20%. According to its financial objectives, the company tries to generate an EBIT margin of over 20% also in future, which we find realistic. In 2017, Harvia’sadjusted EBIT margin was exceptionally low (18%). The drop in the adjusted EBIT margin has been the result of the Sentiotec and Saunamax-acquisitions that brought business with weaker relative profitability into the group. The IPO and its preparation have also depressed profitability for the past two years.
Based on our estimates, Harvia’s EBIT margin will return to 20% by 2020. Harvia is currently integrating Sentiotec’s manufacturing processes into its plants and making them more efficient. Sentiotec’s products have high technology and modern design but, according to our view, their production process is clearly more complex and less efficient than that of Harvia’s own products. Once Harvia is able to combine its own strong production know-how with Sentiotec’s higher-end products we feel the company has good prospects to raise the profitability of Sentiotec’sproducts to the same good level as the rest of the group.
Harvia’s measures to improve profitability and aim to increase sales of more expensive and higher margin products next to sauna heaters (e.g. control unit and other sauna accessories) will, according to our estimate, affect the company’s EBIT margin positively in coming years.
EPS and dividend estimates
Harvia’s number of shares doubled in the IPO to
18.5 million shares in addition to which repayment of shareholder loans and rearrangement of MFI loans lower financing costs considerably from previous years. So our estimated EPS should not be compared with the time prior to the IPO.
We expect Harvia’s EPS to be EUR 0.38 in 2018 of which our dividend estimate with an 80% distribution ratio is EUR 0.31. The reported result is depressed in 2018 by non-recurring costs related to the IPO but is, in turn, raised by the EUR 1.6 million positive deferred taxes recorded by the company in Q1. Harvia did not distribute dividend for the fiscal years 2015 and 2016. Harvia’s shareholders have, however, authorized the Board of Directors to decide on a dividend distribution of max. EUR 3.5 million in fall 2018 from the distributable equity of 2017. Therefore, we expect that the company will distribute a dividend of around EUR 0.18 per share this fall. Harvia’s aim is to distribute increasing dividend twice a year and with a payout of at least 60% of net income. According to our estimates, the company will generate extremely strong cash flow and profitability over the next few years, which is why we expect the payout ratio to be around 75-80% in 2018 to 2021.
In 2019, we expect EPS to grow to EUR 0.44 supported by growing revenue, improving EBIT margin and decreasing financing costs. With the estimated 75% payout ratio, the dividend paid on the 2019 result will be EUR 0.33 which translates into a 5.5% dividend yield.
10,110,7
11,412,3
13,013,6
20%
18%
19%
19%20%
20%
15%
16%
17%
18%
19%
20%
21%
22%
0
2
4
6
8
10
12
14
2016 2017 2018e 2019e 2020e 2021e
Operating profit estimates
Oikaistu liikevoitto (MEUR) liikevoitto-%EBIT excl. NRIs (MEUR) EBIT-%
0,30
0,38
0,44
0,480,52
0,18
0,310,33
0,360,39
0,00
0,10
0,20
0,30
0,40
0,50
0,60
2017 2018e 2019e 2020e 2021e
EPS and dividend estimates
EPS (raportoitu) OsinkoEPS (reported) Dividend
28
EstimatesEstimate model, MEUR 2016 2017 2018e 2019e 2020e 2021e
Finland 20,8 22,2 22,8 23,5 24,2 25,0
growth-% 2 % 7 % 3 % 3 % 3 % 3 %
Other Nordics 3,1 3 ,3 3,4 3,5 3,6 3,7
growth-% 6 % 7 % 2 % 2 % 4 % 4 %
Germany 3,7 7,4 7,3 7,7 8,0 8,3
growth-% 54 % 102 % 0 % 5 % 4 % 4 %
Other EU countries 10,2 14,0 14,7 15,3 15,9 16,6
growth-% 18 % 37 % 5 % 4 % 4 % 4 %
Russia 6,1 6,2 5,8 6,0 6,3 6,6
growth-% -7 % 1 % -7 % 4 % 5 % 5 %
North America 2,4 3,0 3,0 3,1 3 ,2 3,2
growth-% 48 % 24 % 0 % 5 % 4 % 4 %
Other Countries 3,7 4,0 4,4 4,4 4,6 4,8
growth-% -3 % 6 % 10 % 1 % 4 % 4 %
Revenue (MEUR) 50,1 60,1 61,4 63,5 65,9 68,2
growth-% 8 % 20 % 2 % 3 % 4 % 4 %
Materials and services -20,8 -25,0 -25,3 -25,4 -26,0 -26,9
% of revenue -41 % -42 % -41 % -40 % -40 % -40 %
Gross profit (MEUR) 29,3 35,1 36,1 38,1 39,9 41,3
Gross margin-% 59 % 58 % 59 % 60 % 61 % 61 %
Personnel expenses -9,9 -12,3 -13,0 -13,5 -14,3 -14,8
% of revenue -20 % -20 % -21 % -21 % -22 % -22 %
Other operating expenses -8,5 -11,9 -11,1 -10,6 -10,9 -11,3
% of revenue -17 % -20 % -18 % -17 % -17 % -17 %
EBITDA (MEUR) 11,3 11,2 12,1 14,2 14,9 15,4
EBITDA-% 23 % 19 % 20 % 22 % 23 % 23 %
EBIT excl. NRIs (MEUR) 10,1 10,7 11,4 12,3 13,0 13,6
EBIT-% 20 % 18 % 19 % 19 % 20 % 20 %
EBIT (MEUR) 9,7 9,3 10,2 12,3 13,0 13,6
EBIT-% 19 % 15 % 17 % 19 % 20 % 20 %
Net financial expences -5,1 -4,9 -3,4 -2,0 -1,8 -1,6
Pretax profit (MEUR) 4,6 4,3 6,8 10,3 11,2 12,0
% of revenue 9 % 7 % 11 % 16 % 17 % 18 %
Taxes -1,3 -1,4 0,3 -2,1 -2,2 -2,4
Tax rate-% -28 % -33 % 4 % -20 % -20 % -20 %
Net profit (MEUR) 3,3 2,9 7,1 8,2 8,9 9,6
% of revenue 7 % 5 % 11 % 13 % 14 % 14 %
%-change -13 % -12 % 142 % 16 % 9 % 7 %
EPS (reported) 0,35 0,30 0,38 0,44 0,48 0,52
Dividend 0,18 0,31 0,33 0,36 0,39
29
Estimates
0,0 %
5,0 %
10,0 %
15,0 %
20,0 %
25,0 %
0
10
20
30
40
50
60
70
80
2016 2017 2018e 2019e 2020e 2021e
Revenue and EBIT-%
Revenue EBIT-%
0%
100%
200%
300%
400%
500%
0%
10%
20%
30%
40%
50%
60%
70%
2016 2017 2018e 2019e 2020e 2021e
Balance sheet
Equity ratio Gearing-%
P&L statement 2016 2017 2018e 2019e 2020e 2021e
Revenue 50,1 60,1 61,4 63,5 65,9 68,2
EBITDA 11,3 11,2 12,1 14,2 14,8 15,4
EBIT excl. NRIs 10,1 10,7 11,4 12,3 13,0 13,6
EBIT-% 20,1 % 17,8 % 18,6 % 19,3 % 19,7 % 19,9 %
EBIT 9,7 9,3 10,2 12,3 13,0 13,6
Pretax profit 4,6 4,3 6,8 10,3 11,2 12,0
Net profit 3,3 2,9 7,1 8,2 8,9 9,6
EPS 0,38 0,46 0,45 0,44 0,48 0,52
Key figures 2016 2017 2018e 2019e 2020e 2021e
Revenue growth-% 7,9 % 20,0 % 2,2 % 3,4 % 3,7 % 3,5 %
EBITDA-% 22,6 % 18,6 % 19,8 % 22,4 % 22,5 % 22,6 %
EBIT-% 19,4 % 15,4 % 16,6 % 19,3 % 19,7 % 19,9 %
ROE-% 22,1 % 16,1 % 16,1 % 11,8 % 12,4 % 12,8 %
ROI-% 10,0 % 9,2 % 10,0 % 12,0 % 12,5 % 12,8 %
Equity ratio 15,5 % 16,9 % 59,7 % 61,3 % 62,3 % 63,0 %
Gearing-% 451,0 % 385,5 % 36,9 % 32,6 % 28,4 % 24,3 %
Per share figures 2016 2017 2018e 2019e 2020e 2021e
EPS (excl. NRIs) 0,38 0,46 0,45 0,44 0,48 0,52
DPS 0,00 0,18 0,31 0,33 0,36 0,39
Equity per share 1,74 2,02 3,67 3,80 3,95 4,11
Valuation and recommendation 1/3Current market value EUR 111 million
Harvia’s market value with the current share price of EUR 6.0 is EUR 111 million. After the IPO in March 2018 and repayment of shareholder loans, the group has some EUR 30 million in net debt, so the company’s current enterprise value (EV) is around EUR 140 million.
Earnings-based valuation
According to our estimates, Harvia will generate a comparable operating profit of EUR 11.4 million in 2018 (2017: EUR 10.7 million). Non-recurring items mainly linked to the IPO will weaken the reported operating profit and we expect it to remain at EUR 10.2 million (2017: EUR 9.3 million).
The EV/EBITDA multiples based on our 2018 estimates are 11.9x for adjusted EBIT and 13.4x for reported EBIT. The P/E ratio calculated based on our 2018 net profit estimates is 15.8x and the P/E ratio adjusted with non-recurring items is slightly lower, 13.4x. Non-recurring costs related to Harvia’s IPO depress the 2018 reported operating profit, but the net profit, in turn, is boosted by the EUR 1.6 million deferred tax receivables recorded by the company in Q1’18 from intra-group interest payments not deducted from taxes in previous years. Due to the IPO, the 2018 profit and loss account is somewhat exceptional and, thus, we emphasize the 2019 to 2020 results more.
Based on our estimates the 2019 and 2020 EV/EBITDA multiples are 11.0x and 10.2x respectively. The corresponding P/E ratios calculated from the net profit are 13.6x and 12.4x. Considering Harvia’s stable earnings growth potential, high cash flow ratio and moderate risk level, we find the earnings-based
valuation to be attractive.
Balance sheet based valuation
In the Q1’18 report, Harvia’s balance sheet total is EUR 120 million of which shareholders’ equity represents EUR 64 million. The P/B ratio that describes the ratio between the company’s market value and balance sheet value of equity is, thus, 1.6x. The assets in Harvia’s balance sheet consist of the group’s production plants and their machines, inventories (finished and unfinished products), the company’s intangible assets (e.g. customer relationships, brands, technologies, R&D expenditure and software licenses), accounts receivables, and cash and cash equivalents.
Harvia’s balance sheet includes significant goodwill (EUR 59 million) of which a majority was generated in 2014 in connection with HarviaOy’s (now Harvia Finland Oy) and Velha Oy’s acquisitions. Goodwill was also generated in the acquisition of the Estonian Spa Modules business and the acquisition of Sentioteclocated in Austria and Romania, as well as the Saunamax Oy acquisition. If the balance sheet based valuation was examined adjusted by goodwill the P/B ratio would be very high as the company’s goodwill, EUR 59 million is nearly as high as its equity, EUR 64 million. When examining the P/B ratio, Harvia’s return on equity (ROE %) should be considered, it will, according to our estimates for the next few years, be around 13-16%.
Dividend-based valuation
According to Harvia, its aim is to pay increasing dividend with a payout ratio of at least 60% of net income. In our opinion, Harvia has every precondition to profile itself as a strong dividend
company generating stable profitability so we have set the payout ratio in our estimates slightly above the target level (to 75-80%). After the IPO, Harvia has a strong balance sheet and the annual investment needs are low. Thanks to its strong profitability and cash flow we believe the payout ratio could well be higher.
Harvia has a strong position on the current markets but we do not dismiss that the company could use the assets from the IPO to, for example, acquire its traditional competitors to gain market share. The Sentiotec acquisitions in 2016 is a good example of how Harvia tries to gain access to distribution channels through acquisitions in geographical areas where the company does not yet hold a strong position or to gain new technology/design know-how for which, e.g. Sentiotec’s control units are known. We could easily see Harvia’s growth strategy relying on acquiring smaller local operators in coming years.
Before bigger growth investments are on the horizon we do, however, find it very likely that the payout ratio will be above the indicated minimum level of 60%. We estimate that the dividend distributed based on the 2018 result will be EUR 0.31, which would indicate a payout ratio of 82%. We estimate that the dividend distributed based on the 2019 result will be EUR 0.33, which would mean a payout ratio of 75%. These dividend forecasts offer a dividend yield of 5.2% and 5.5% on the current share price of EUR 6.0. We find the dividend yield to be attractive already at the present level, and we believe that as the earnings per share increases the company can increase its dividend in coming years.
30
Valuation and recommendation 2/3Valuation compared to peer group
It is difficult to find identical listed peer companies for Harvia as no other listed companies have an operating model that would be comparable to Harvia’s core business focusing on manufacturing sauna heaters and sauna equipment.
We have used international listed companies in the peer group that each in their own characteristics are similar to Harvia. Common features can be found in the same geographical business area, similar production and distribution strategy, growth and profitability profiles, etc. As Finnish peer companies we have selected, e.g. Rapala, Tikkurila and Nokian Tyres. As Swedish peer companies we have selected, e.g. Thule that manufactures roof racks for cars, Dometic that manufactures air conditioning equipment, appliance manufacturer Electrolux and Nibe that manufactures, e.g. heat pumps. Other peer companies include homeware manufacturer De’Longhi and exercise equipment manufacturer Technogym.
The average EV/EBIT multiples of the international peer group we use for 2018 and 2019 are 14.8x and 13.2x, while the median multiples are 13.7x and 12.4x. With our estimates Harvia’s corresponding multiples are 11.9x and 11.0x or some 11-13% below the peer group.
The peer group’s P/E ratios for 2018 and 2019 are on average 18.8x and 18.6x, the medians being 17.8x and 15.1x. According to our estimates, Harvia’s corresponding adjusted P/E ratios are 13.4x and 13.6x or some 25% and 10% below the peer group. This year, Harvia’s net result will be positively affected by the recorded EUR 1.6 million deferred tax receivables from
losses not deducted in previous years, which results in an especially low P/E ratio for 2018.
The third valuation multiple we would like to highlight is dividend yield. The dividend yields of the peer group based on the estimates for 2018 and 2019 are on average 3.4% and 3.6% with medians of 3.1% and 3.4%. Harvia offers clearly higher dividend yield than the peer group. Based on our estimates, the dividend yield paid on Harvia’s 2018 and 2019 results with a payout ratio of around 75-80% are 5.2% and 5.5%.
DCF valuation
Our cash flow-based valuation model (DCF) also indicates a higher fair value for Harvia than the current market value of the share. According to our DCF calculation, the value of the entire stock is EUR 131 million of EUR 7.1 per share. This would indicate an upside potential of around 18% compared to the current share price of EUR 6.0. We feel the combination of stable strong profitability, low investment needs and a stable cash flow profile makes the use of the DCF model a relevant tool in Harvia’s case.
In our DCF model, the revenue growth is around 2-4% annually in 2018 to 2020. At this forecast range, the company’s comparable EBIT margin improved from around 18% to the 20% level mentioned in the company’s financial objectives. In our medium forecast, growth remains at around 3% in 2021 to 2025, which means the EBIT margin will be around 19%. In our terminal forecast, growth remains at 2.0% and the EBIT margin drops to 18%.
In our DCF model, the weight of the terminal period in the value of cash flows is 56%. The average cost of capital (WACC) used in the
model is 7.9%, the risk-free interest rate is 3.0%, the market risk premium is 4.8% and the beta is 0.9. Due to the weak liquidity of Harvia’s share, we have also considered the liquidity premium (2.0 percentage points) in our WACC calculation, without which the average cost of capital would be lower.
Target price and rating
We start coverage of Harvia with a target price of EUR 6.5 and an accumulate rating. Our rating is based on valuation multiples calculated based on our estimates stemming from Harvia’sstrategy, financial objectives and market outlook for coming years, cash flow based valuation and the relative valuation of the peer group we have used.
In Harvia’s valuation, we emphasize earnings and dividend based valuation indicators most, based on which Harvia is, on average, valued (depending on the indicator) some 10-15% below the peer group. Due to Harvia’s stable growth and profitability, as well as strong cash flow profile, we also put a lot of weight on our DCF model that is based on cash flows and, according to which, Harvia’s share has an upside potential of nearly 20% compared to the current share price. A dividend yield that is clearly above average also supports the share price, and we believe Harvia will be profiled as a company that offers strong and stably growing dividends.
31
Valuation and recommendation 3/3Sensitivity analysis
Earnings per share
We have made sensitivity calculations with our short-term estimates in order to be able to examine the share price potential of Harvia’sshare if the company’s revenue and EBIT margin would deviated clearly from our estimates. We have selected the revenue growth and EBIT margin in 2019 as the modifiable parameters. Otherwise, we have maintained standard assumptions, that is unchanged number of shares, 20% tax rate, financial expenses at around EUR 2 million, etc.
In our negative scenario, revenue growth is only 0.5% in 2018 and the EBIT margin is 17%. In the table on the left and in the top left-hand corner you can see the 2019 earnings per share based on our sensitivity analysis with these assumptions (EUR 0.38). In the optimistic scenario, revenue will grow more strongly than the company objective in 2019, by 6.5% and the EBIT margin rises to 22%. With this calculation, the EPS would grow to EUR 0.55 as indicated in the table on the left and in the bottom right-
hand corner according to our sensitivity analysis. In the table on the left, the 3.5% revenue growth for 2019 and an EBIT margin of around 19% in line with our estimates are indicated in blue, which would result in an EPS of around EUR 0.45.
Price with P/E ratio 14x
If we consider a P/E ratio of 14x acceptable for the company for 2019 (average of the P/E ratio we predict for the company for 2018 and 2019), using our negative scenario, the share price based on the sensitivity analysis would be EUR 5.3 as indicated in the top left-hand corner of the middle table. This would require the revenue growth of the company to slow down clearly and the EBIT margin to be clearly below the company’s objective. In the optimistic scenario, the share price would be EUR 7.8 as in the bottom right-hand corner.
In the neutral scenario, with 3.5% revenue growth and an EBIT margin of 19% the share price would, according to our sensitivity analysis, be EUR 6.3.
Share price potential with a EUR 6.0 share price
As the right side table shows, the share price potential for the negative scenario with the current share price is -11%. If the company would perform according to the neutral scenario, and the share would be priced at a 14x P/E ratio relative to the 2019 result, the share would have a 6% upside potential with the current share price. If the optimistic scenario of the sensitivity analysis would materialize, we see a 30% upside potential in the share.
Summary
Our sensitivity analysis contains many assumptions and has numerous simplifications. However, as a summary, we can say that we see a clearly smaller downward potential in the share in case of a negative surprise than how much the share could rise based on our estimates in case of the positive scenario materializing.
32
EPS
0,5 % 2,0 % 3,5 % 5,0 % 6,5 %
17 % 0,38 0,39 0,40 0,40 0,41
18 % 0,41 0,42 0,42 0,43 0,44
19 % 0,44 0,44 0,45 0,46 0,47
20 % 0,46 0,47 0,48 0,49 0,50
21 % 0,49 0,50 0,51 0,52 0,53
22 % 0,52 0,53 0,54 0,55 0,56
Revenue growth-% 2019
EB
IT-%
Price with P/E ratio 14x
0,5 % 2,0 % 3,5 % 5,0 % 6,5 %
17 % 5,3 5,4 5,5 5,6 5,7
18 % 5,7 5,8 5,9 6,0 6,1
19 % 6,1 6,2 6,3 6,4 6,6
20 % 6,5 6,6 6,7 6,8 7,0
21 % 6,9 7,0 7,1 7,2 7,4
22 % 7,3 7,4 7,5 7,7 7,8
Revenue growth-% 2019
EB
IT-%
Share upside potential with EUR 6.0 share price
0,5 % 2,0 % 3,5 % 5,0 % 6,5 %
17 % -11 % -9 % -8 % -6 % -4 %
18 % -4 % -3 % -1 % 1 % 2 %
19 % 2 % 4 % 6 % 7 % 9 %
20 % 8 % 10 % 12 % 14 % 16 %
21 % 15 % 17 % 19 % 21 % 23 %
22 % 21 % 23 % 25 % 28 % 30 %
Revenue growth-% 2019
EB
IT-%
Valuation summary
33Source: Inderes, Reuters
6
7
8
9
10
11
12
13
14
15
29.1.2010 29.1.2011 29.1.2012 29.1.2013 29.1.2014 29.1.2015 29.1.2016 29.1.2017 29.1.2018
Mediaani Keskiarvo
Harvia’s multiples (2018-2020), Inderes Peer group long term valuation on EV/EBIT multiple
Long-termaverage 12.2x
0
2
4
6
8
10
12
14
16
18
2018e 2019e 2020e
P/E
P/E
9
10
10
11
11
12
12
13
2018e 2019e 2020e
EV/EBIT
EV/EBIT
4,6 %
4,8 %
5,0 %
5,2 %
5,4 %
5,6 %
5,8 %
6,0 %
6,2 %
2018e 2019e 2020e
Dividend yield %
Osinkotuotto-%Dividend yield-%
Valuation multiples 2018e 2019e 2020e
Share price 6,00 6,00 6,00
MCAP 111 111 111
EV 136 134 132
P/E (excl. NRIs) 13,4 13,6 12,4
P/E 15,8 13,6 12,4
P/Cash flow 10,2 11,8 11,3
P/B 1,6 1,6 1,5
P/S 1,8 1,8 1,7
EV/Sales 2,22 2,11 2,0
EV/EBITDA 10,2 9,4 8,9
EV/EBIT 11,9 11,0 10,2
Payout ratio-% 81,6 % 75,0 % 75,0 %
Dividend yield-% 5,2 % 5,5 % 6,0 %Median Average
Peer group valuation
34
Share price MCAP EV P/B
Company MEUR MEUR 2018e 2019e 2018e 2019e 2018e 2019e 2018e 2019e 2018e 2019e 2018e
Thule Group AB 217,8 2216 2397 20,1 18,2 19,0 17,3 3,8 3,6 25,5 22,8 3,1 3,4 5,8
Nobia AB 72 1212 1154 8,7 8,6 7,2 7,0 0,9 0,9 11,8 11,7 6,1 5,5 3,0
Dometic Group AB (publ) 93 2699 3675 13,7 12,6 11,8 10,9 2,1 2,0 14,7 13,2 2,5 2,7 1,7
Tikkurila Oyj 15,2 669 761 17,8 14,5 12,5 10,7 1,3 1,3 21,9 17,6 5,3 5,3 3,9
Nokian Tyres plc 35,7 4884 4727 12,2 11,4 9,7 8,9 2,9 2,7 16 15,1 4,5 4,7 3,1
Rapala VMC Corp 3,5 135 210 13,1 10,2 8,9 7,6 0,8 0,8 17,8 12,6 2,2 3,2 0,9
Husqvarna AB 87 4921 5609 13,7 12,1 10,3 9,3 1,4 1,3 17,5 15,1 2,8 3,2 2,9
Inwido AB (publ) 68 389 582 8,6 8,1 6,9 6,6 0,9 0,9 7,8 7,7 6,3 6,5 1,2
Nibe Industrier AB 92,92 4080 4673 17,3 15,9 14,1 13,0 2,2 2,1 23,7 21,8 1,2 1,4 3,3
Technogym SpA 10,64 2139 2181 21,1 19,0 16,6 14,9 3,4 3,2 30,3 26,1 1,0 1,2 11,3
Rockwool International A/S 2346,00 6512 6316 18,8 16,8 12,3 11,3 2,4 2,3 26,2 24,3 1,3 1,6 3,6
Kingspan Group PLC 40,72 7298 7849 19,1 17,0 16,1 14,5 1,9 1,7 22,6 20,1 1,0 1,1 4,2
Electrolux AB 214,50 6534 6637 9,6 8,5 6,1 5,6 0,5 0,5 12,1 10,6 4,1 4,4 2,7
De' Longhi SpA 24,64 3671 3428 12,8 11,8 10,5 9,8 1,7 1,6 20,3 18,4 3,7 3,4 3,5
Harvia (Inderes) 6,00 111 136 11,9 11,0 10,2 9,4 2,2 2,1 13,4 13,6 5,2 5,5 1,6
Average 14,8 13,2 11,6 10,5 1,9 1,8 18,8 16,6 3,4 3,6 3,5
Median 13,7 12,4 11,1 10,2 1,8 1,6 17,8 15,1 3,1 3,4 3,1
Difference-% vs. Median -13 % -11 % -9 % -8 % 27 % 30 % -25 % -10 % 64 % 64 % -48 %
Source: Reuters, Inderes
EV/EBIT EV/EBITDA Div. yieldP/EEV/Sales
35
DCF cash flow calculationDCF model (MEUR) 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e TERM
EBIT (operating profit) 9,3 10,2 12,3 13,0 13,6 13,4 13,8 14,2 14,6 14,2 14,5
+ Depreciation 1,9 2,0 2,0 1,9 1,8 1,8 1,8 1,8 1,8 1,8 1,8
- Paid taxes -1,3 0,3 -2,1 -2,2 -2,4 -2,4 -2,4 -2,5 -2,6 -2,5 -2,7
- Tax, financial expenses -1,0 0,1 -0,4 -0,4 -0,3 -0,3 -0,3 -0,3 -0,3 -0,3 -0,2
+ Tax, financial income 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
- Change in working capital -1,2 0,1 -0,6 -0,7 -0,7 -0,6 -0,6 -0,6 -0,6 -0,6 -0,4
Operating cash flow 7,7 12,6 11,2 11,6 12,1 11,9 12,2 12,5 12,9 12,6 13,0
+ Change in other long-term liabilities 0,2 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
- Gross CAPEX -1,7 -1,7 -1,7 -1,8 -1,8 -1,9 -1,9 -2,0 -2,0 -2,1 -2,1
Free operating cash flow 6,2 11,0 9,5 9,8 10,2 10,1 10,3 10,6 10,8 10,5 10,9
+/- Other 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
FCFF 6,2 11,0 9,5 9,8 10,2 10,1 10,3 10,6 10,8 10,5 10,9 187,4
Discounted FCFF 10,5 8,4 8,1 7,8 7,1 6,8 6,4 6,1 5,5 5,3 90,6
Sum of FCFF present value 162,8 152,2 143,8 135,7 127,8 120,7 113,9 107,5 101,4 95,9 90,6
Debt free DCF 162,8
- Interesting bearing debt -37,7
+ Cash and cash equivalents 8,3
-Minorities 0,0
-Dividend/capital return -1,7
Equity value DCF 131,7
Equity value DCF per share 7,1
WACC
Tax-% (WACC) 20,0 %
Target debt ratio (D/(D+E) 10,0 %
Cost of debt 5,0 %
Equity Beta 0,90
Market risk premium 3,75 %
Liquidity premium 2,00 %
Risk free interest rate 3,0 %
Cost of equity 8,4 %
Average cost of capital (WACC) 7,9 %
26%
18%
56%
2018e-2022e
2023e-2027e
TERM
Cash flow distribution
2018e-2022e 2023e-2027e TERM
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methodology Inderes uses is based on the percent difference of the current price and our 12-month target price. The recommendation policy has four levels with sell, reduce, accumulate and buy. The recommendations and target prices of Inderes are examined at least four times a year after company’s quarterly reports. However, it is possible to change recommendation and / or target price at any time it is necessary. The given recommendations and target prices do not guarantee that the stock’s development is in accordance to the valuation that has been made. In producing target prices and recommendations, Inderes primarily uses the following valuation methods: Discounted Cash Flow analysis (DCF), Economic Value Added model (EVA), valuation multiples, relative valuation and Sum of Parts analysis. The valuation methodologies applied and the bases for target prices are company specific and may significantly vary depending on the company and/or sector.
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Recommendation Upside potential*
Buy > 15 %
Accumulate 5 - 15 %
Reduce -5 - 5 %
Sell < -5 %
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Recommendation history, LTM
Date Recommendation Target price Share price
17.6.2018 Accumulate 6,50 € 6,00 €
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Inderes Oy
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