HKFoods as an investment

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Here is a comprehensive report on HK Food by Pauli Lohi, like other extensive reports, it is available for everyone to read. If HK or other companies in the industry interest you, it’s worth reading - you can gain a lot of general information about the industry from it. :slight_smile:

In recent years, HKFoods has achieved an impressive turnaround in results, supported by, among other things, the strengthening of its investment capacity through the divestment of operations outside Finland. Although, in our estimation, the largest increase in profitability is already behind us, we believe the company still has the potential for a moderate increase in profitability, which makes the valuation appear relatively inexpensive. If profitability were to rise to the level of its main competitors, the stock would have significant upside potential. On the other hand, relatively high indebtedness and historical challenges in profitability raise the stock’s risk level compared to the average for a defensive industry. We reiterate our ‘add’ recommendation and a target price of 1.70 euros.

https://www.inderes.fi/research/hkfoods-laaja-raportti-kannattavuuskaanteesta-totta

Quoted from the report:

Potential to become a defensive dividend company

In the long term, HKFoods’ businesses have the potential to be defensive and dividend-paying, albeit with a mediocre return on capital. The reduction in red meat consumption is slow, and the consumption of poultry and more processed foods is growing, so in the long term, we assume market growth will be close to general GDP growth. The meat industry and the food sector in general are competitive and capital-intensive industries where it is difficult to sustainably achieve a return on invested capital that exceeds the required rate of return. On the other hand, in the short term, we see HKFoods as a turnaround company whose realization of earnings potential could support the stock price development.

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We chatted with @Pauli_Lohi about HKFoods regarding the new extensive report! :blush:

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Here are Pauli’s comments on how the Baltic contingent additional purchase price does not seem to materialize now.

In our view, the weakening outlook for the contingent purchase price receivable has a small negative impact on the fair value of the share (written-down receivable 5% of the share price). We will calculate cash flow forecasts related to the receivable at the latest in connection with the Q3 report. However, the write-down does not cause an immediate need for a recommendation change, as its significance for the overall equity story is small. The sale of the Baltic businesses still seems to us a successful measure, as the fixed purchase price was already high in relation to the weak profitability of the sold business.

Kurssien ja niiden muutosten kyselyt, kauhistelut ja hehkuttelut (Osa 4)
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In recent days, Hkfoods has risen without a clear reason. Is this a sympathy move? Below is the AI’s answer.

A classic example of a sympathy move.

When Atria publishes better-than-expected results, investors conclude that the entire food or meat processing sector may be in the same situation: raw material prices, demand, or consumer behavior may also benefit HKFoods (HKScan).

Even if HK has not yet published its own results, the market prices in advance the possible positive development — which is why its share price rises “without its own news”.

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HKFoods Plc’s Interim Report January-September 2025: Growth in Comparable Operating Profit Continued in the Third Quarter - Inderes

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Here are Pauli’s comments on the result. :slight_smile:

HKFoods reported its Q3 interim report today, which was largely in line with our forecasts regarding operating profit. Revenue was lower than expected as lower-margin segments contracted. Net profit was surprisingly strong, influenced by lower-than-forecast net financial expenses and taxes. Overall, we consider the report to be quite neutral relative to expectations, unless other key points of note emerge at the company’s 10 AM press conference.

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Pauli interviewed HFoods’ CEO Juha Ruohola :slight_smile:

Topics:

00:00 Start
00:14 “Good performance in Q3”
01:09 Retail and Foodservice market
02:19 Impact of nutritional recommendations on demand
02:47 Increased price of beef weighed on profitability
04:25 Tariffs imposed by China on pork
05:58 Impact of pork oversupply on the Finnish market
06:32 Focus areas of the new strategy
08:10 Increase in operating profit target

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Pauli “Ora et labora” Lohi, as a diligent fellow, has already prepared a company report. :slight_smile:

A largely unsurprising Q3 report led to moderate positive forecast changes, mainly due to a decrease in financing costs. We see the operational turnaround continuing, albeit at a more moderate pace than before, which, together with the gradual normalization of financing costs, rapidly lowers valuation multiples. We reiterate our Add recommendation and raise the target price to EUR 1.80 (previously EUR 1.70).

Quoted from the report:

Potential to become a defensive dividend company

In the long term, HKFoods’ businesses have the potential to become defensive and dividend-paying, albeit with mediocre capital returns. The reduction in red meat consumption is slow, and the consumption of poultry and more processed foods is growing, so in the long term, we assume market growth will be close to general GDP growth. The meat industry and the food sector in general are competitive and capital-intensive industries where it is difficult to sustainably achieve returns on invested capital that exceed the required rate of return. On the other hand, in the short term, we see HKFoods as a turnaround company, whose earnings potential realization could support share price development.

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CFO making purchases, 20,000 shares at a price of €1.63/share.

A nice small signal that the company’s daily operations have now stabilized and the crises have been overcome.

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For the fourth quarter, there probably won’t be any write-downs related to international business operations anymore, so the full-year result might already be clearly positive, assuming the positive earnings momentum continues. In 2024, the fourth quarter’s operating profit was approximately 29% of the full year’s operating profit, and in 2023, about 21.7%. Q4 2023 is probably a somewhat poor comparison point, because at that time, more international units were still part of the group. If we now use that relative share of Q4/2024 operating profit as a base value, then 71% of the full year’s operating profit would have accumulated by 1-9/2025, and thus, with this calculation method, the operating profit for the last quarter would be approximately 8.9 million euros: (21.8 / 0.71) - 21.8 = 8.9.

I was wondering that since -2.7 million euros of the 1-9/2025 fiscal year result is attributable to the parent company’s owners (of which -0.4 million euros is from the third quarter), and +2.1 million euros to non-controlling interests, how might that affect the investment calculations of larger investor entities (institutions and whatever else there is)? If it does affect, it might still keep some investors away from HKFoods’ stock, because the parent company’s owners are still incurring losses from the operations. Of course, I don’t know the accounting principles of the investment world, so this was more of a random chatterer’s musings aloud.

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I’m responding a bit late to this question about the negative result for shareholders.

HKFoods’ result for the current year is burdened by write-downs related to the conditional additional purchase price receivable from its Baltic business. This means the purchase price included uncertain items, the receipt of which now seems unlikely. It is certainly a shame that the additional purchase price will not be received, but it is still just an isolated issue that is not connected to HKFoods’ longer-term earning capacity.

The value of a share is based on its long-term cash flows. In HKFoods’ case, the result is expected to turn positive for shareholders in the coming years (supported, for example, by the upward trend in adjusted operating profit and decreasing financing costs).

Therefore, I do not believe that the negative result for shareholders in the current year would be a significant deterrent for investors as an isolated factor. If we consider negative factors from the perspective of institutions, these could relate, for example, to the capital-intensive and slow-growing industry and the company’s capital allocation (paying dividends before redeeming an expensive hybrid loan).

Our forecasts roughly anticipate an adjusted operating profit for Q4 at the same level as the comparison period. My own expectations in this regard are relatively confident.

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I posted this in the Atria thread, so I’ll post it here too, as it will also affect HooKoo :slight_smile: :backhand_index_pointing_up:

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HKFoods Plc distributes the second installment of capital repayment of 0.05 euros per share | Kauppalehti

Christmas sales went well.

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Here are Pauli’s comments after the company’s board of directors decided to pay a second capital repayment installment. :slight_smile:

Returning the additional installment to shareholders could, in principle, be a favorable signal of the board’s confidence in the company’s earnings development. On the other hand, the distribution of funds weakens the company’s balance sheet buffers and slightly increases uncertainty regarding the reduction of financing costs. In our opinion, the payment of the additional installment does not have a significant impact on the fair value of the share.

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Pauli has written a new company report on HK. :slight_smile:

HKFoods’ operational profitability has taken a major step forward over the last few years. However, the company’s profitability is still clearly lower than its main domestic competitors, and in a favorable scenario, the potential for earnings growth would still be significant. Our current forecasts, however, assume that the fastest phase of earnings growth is already over, and the earnings growth we forecast for 2026 is already quite moderate. The stock’s EV/EBIT-based valuation appears very attractive even in light of the results for the year now ending, and the expected decrease in financial expenses will also push P/E multiples low in the coming years.

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I find it a bit strange that the analyst commentary didn’t highlight HKFoods’ biggest problem: ownership risk and inefficient capital allocation, which results in high capital costs.

Especially considering that this year the company has made egregious mistakes in capital allocation, paying out over 12 million euros in dividends at a time when the indebted company is paying high interest on its debt and is, as a result, in a much weaker position in debt negotiations than it would be without the excessive dividend payout.

Given that meat producers hold the voting majority through the LSO cooperative (2/3 of the votes, 1/3 of the shares), it is also important to pay attention to how the interests of the majority owner’s interest group and those of other shareholders align, both now and in the future.

I do own shares in the company and am considering adding at this level, but I want to maintain a clear picture of both the company’s positives and negatives.

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If the situation between China and Taiwan escalates, is there a major risk for the company? What if exports to China were to stop completely?

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I’m writing here about HKFoods’ ownership, which I believe is important for every investor in the company to understand. The company’s shares are divided such that the voting power remains with LSO-Osuuskunta (LSO Cooperative). Members of LSO-Osuuskunta are meat producers. A member must have active production, and the size of the membership contribution is determined based on turnover; interest is paid on this contribution from LSO-Osuuskunta’s results. A producer might have, for example, a €50,000 contribution obligation, on which roughly 5% interest is paid.

Example: when HKFoods generates a profit in 2025 and the 2026 annual general meeting decides to pay a dividend, LSO-Osuuskunta receives that dividend in 2026, which then forms the cooperative’s 2026 result. In 2027, the cooperative’s representative council decides in its meeting on the payment of interest on the cooperative capital.

And this is precisely the company’s problem. Producers want a good price for the meat they produce and, at the same time, a good interest rate on their cooperative capital. There likely wouldn’t be a problem if the producers weren’t the ones making the decisions, but I suspect that as the voting power holders, the Cooperative also exercises its voting rights. In addition to this, many producers may have significant holdings of the company’s shares in their own portfolios or through production facilities structured as limited companies. There is, of course, nothing illegal about a person having all their eggs in one basket.

HKFoods’ voting ownership being held by producers is not solely a bad thing. Producers need HKFoods, and HKFoods cannot conduct business without the producers. For the company, obtaining raw materials is a prerequisite for having something to process. Production contracts are essential for the company, but a production contract where the company buys all the meat produced by the producer is also vital for the producer. The problem arises when the market needs to be adjusted—meaning production needs to be cut. At this point, when the CEO suggests that it’s time to send sows to slaughter (reduce production), an angry LSO-Osuuskunta member influences things through their networks so that the CEO gets fired, because the producer doesn’t want to cut their production. The interest of the company and the interest of the producer are in conflict, even though, in reality, the company’s interest is the producer’s interest.

This production contract model is different from, for example, the forest industry. In the forest industry, they don’t buy if there is no demand. The meat sector buys because there is a contract. The price fluctuates, of course, but freezing meat is a bad business.

Hopefully, my post shed light on some of the pain points of the company’s ownership for someone. It’s worth keeping an eye on LSO-Osuuskunta as well as the company itself. I do not own shares in the company myself. I have owned them in the past and follow the company out of interest because I’ve become familiar with it over the decades.

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Livestock and Farseer hit the nail on the head, in my opinion. HK’s leverage ratio has been trending in a better direction, and the stock price still has upside potential through 2026. However, a very significant ownership risk associated with the company must be priced into the share price. LSO’s strategic intent does not necessarily align with the interests of the company or its other shareholders, of which last year’s dividend is a very fresh reminder.

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An interesting perspective on the significance of ownership for a company’s profitability. Firstly, in a limited liability company, no shareholder may be favored at the expense of other shareholders. That would be against the law. The fact that a company has one major owner in terms of voting power can be a benefit rather than a disadvantage to other shareholders. I originally bought Norwegian, HKScan, and Bittium because their key personnel and major shareholders knew their industry and knew what they were doing. It’s just frustrating that I sold my Bittium shares before last week’s peak price (29.95).

It is in the interest of meat producers to get the highest possible return on their invested capital—not just to sell the meat they produce at the highest possible price. The priority is to keep the apparatus on which their livelihood depends functional. The meat processing company buys meat at market price, because buying at a higher price from LSO could be interpreted as favoring LSO as a shareholder. It is not in LSO’s interest to hinder the streamlining of meat production or any other development in any way. This is why farm sizes are growing and the total number of producers is decreasing.

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