Of course, the most important thing is to consider the future of the industry. However, Martela is more than just an office furniture supplier. Schools, elderly care homes, restaurants, shopping centers, everywhere where durable, higher-quality furniture is needed. Ikea’s and Jysk’s cheap, often self-assembly products don’t quite meet the requirements. Customers are offered a full service: furniture, rental of furniture, interior design, and relocations. One would think there’s a market niche, perhaps not as large, but hopefully more profitable than before. On social media, Facebook etc., Martela has a quite visible presence, and their products also have clear online prices; before, one had to guess, outlet cheaper. Now at trade fairs with Artek and Vitra, it creates that premium image..
The Educa fair will be held again at Messukeskus Helsinki on January 24–25, 2025. You can find us at stand 6d48 together with Artek and Vitra. New products and our updated material selection will be on display at the stand.
Also, come and hear our presentation on the Future Classroom stage on Fri, Jan 24, at 10:30–11:00, where Maarit Malmberg, principal of the new Lauttakylä school, will share her experiences on the successful implementation of the school project and how furniture supports the school’s pedagogy.
In the US, there are large companies like Millerknoll and Steelcase. Both have over 10,000 employees. EV/revenue approx. 0.4. Not much, but still almost 10 times higher valuation (excluding lease liabilities).
Among Martela’s most interesting new products is Hubbe, where one can see influences from, for example, Fritz Hansen’s Egg chair. It creates a sound-insulating (made of felt), sheltered, safe, and table-equipped unit for the user.
Thomas has prepared a new company report on Martela.
Martela’s year ended weaker than expected despite signs of recovery in the office furniture market. The loss-making result level, together with a weakened balance sheet position, raises concerns about the company’s financial position, considering the seasonally challenging start of the year. Without concrete signs of a turnaround in results, the stock’s risk profile remains intolerably high, as a result of which we reiterate our sell recommendation.
I would underline the importance of this loss buffer, because even though the company was debt-free at the end of Q3, a loss-making Q4 result and a seasonally challenging H1 still cause a significant financing gap. The end of the year, however, is typically the time of year when the results of this business are made… According to the 2023 annual report, Martela had a 0.3 MEUR overdraft facility available, which is not enough to cover this.
Kaisa filled in for me during my holidays, I’ll take this on her behalf.
The most significant difference when comparing the balance sheets of the group and the parent company, in my opinion, arises from the accounting impact of the sale and leaseback of the Nummela Logistics Center. If you recall, Martela recorded a sales gain of almost 13 MEUR in 2022 related to this transaction. However, this was only partially reflected in the group’s figures (the group recorded the sales gain only for the portion after the contract period, while the parent company recorded the full amount in its entirety. This increases the parent company’s equity compared to the group figures.
A person with a controller background certainly understands the effects of IFRS 16 sale and leaseback transactions on solvency ratios better than I do, but in my interpretation, in Martela’s case, the transaction causes the group’s key figures to create a weaker picture of reality, e.g., regarding equity ratio and net indebtedness, whereas the parent company’s figures, following FAS accounting, create a rosier picture of reality. The parent company’s figures, while fully accounting for the sales gain from the sale and leaseback (increases equity), do not include lease liabilities (decreases the parent company’s balance sheet liabilities).
In the long run, the most crucial thing, in my opinion, would be to reduce the seasonal fluctuation in profitability, so that there would be less to catch up on at the end of the year to achieve a profitable financial year. Of course, this would also be easier if the tight competitive situation in the industry eased somewhat. I agree that, in my opinion, the company’s sales channels in digital channels seem to have developed positively, and investments have been made in them in recent years.
In what order of probability (1st being the most probable) would you see Martela’s different scenarios materializing this year? Of course, several of these could materialize, but not all (or then a world record for screwing up has been set).
Perhaps putting things in order is a bit too difficult a task for anyone.. A short-term cash crisis shouldn’t be a problem in itself. Just leave the invoices unpaid. Many large companies do this. (Forest giant Stora Enso admits that it has intentionally paid suppliers’ invoices late.)
The company has presumably met its payment obligations, as it hasn’t appeared on protest lists so far. The first concrete sign of cash flow problems is appearing on a protest list. Naturally, the magnitude of the disruption should also be taken into account.
It has somewhat given the impression that the company has outsourced the reporting of unpleasant matters to Inderes. Well, of course it’s worth paying for that too, so you don’t have to state unpleasant facts, but someone else does it for you.
For example, the ‘attractiveness’ of a rights issue could be quite negligible for Martela. Or what do you, as a shareholder, think? Hypothetically: would you participate in a rights issue? I would think that not participating would mean technical bankruptcy for the ‘old’ share. Putting new money into a well…?
In connection with a rights issue, there should be some structural / corporate arrangement. Otherwise, it is a doomed issue, which would have to be arranged to be infernally dilutive, so that it would technically be a reset of the old share.
As a side note in the mix, management personnel owe the company through their share acquisitions, which the company has financed 70%. Bankruptcy would certainly not be a primary option for them either, where the share is zeroed out, but they remain indebted to the bankruptcy estate.
I’m not participating in the offering (as there’s no guarantee of a new one soon), but if the whole company is being offered, then I’ll have to reconsider, maybe even get Musk as a restructuring consultant. It’s easy to say ‘you are fired’ via video call https://www.youtube.com/watch?v=qdX6yTMB19M
They probably didn’t know yet at that point how much depreciation they would book against the profit? In my opinion, they just make themselves look stupid by speculating about some holiday season sales.
Thomas has made a comprehensive report on Martela, and like other comprehensive reports, it is available for everyone to read.
After years of quiet, the Nordic office furniture market finally shows signs of recovery, but based on the sharp profit warning issued last week, this is not yet reflected in Martela’s profitability. The need for a rapid turnaround in results is evident for Martela, as the company’s balance sheet position could no longer withstand losses similar to those of recent years. In our view, the current share price significantly prices in the potential related to a turnaround in results more strongly than the risks, which leaves the share’s risk/reward ratio weak.
Quoted from the report:
Recent years have been challenging, but we see potential for improvement
In our opinion, Martela’s relative competitive position is reasonable in terms of offering and capabilities. However, these attributes have been overshadowed by a difficult market situation in recent years. Martela has, however, laid a better foundation for itself and thus for its ability to improve, with the most concrete examples, in our view, being the expanded export distribution network and new product launches. With the correction of internal pain points, its relatively large size, strong brand recognition, and key capabilities, Martela, in our opinion, has at least satisfactory prerequisites to improve its position on the competitive landscape’s growth and profitability map. However, this will not happen for free, and it requires continuous focus from the company on maintaining daily competitiveness.
In our view, the stock’s current price level prices in the potential related to an earnings turnaround significantly stronger than the risks, which leaves the stock’s risk/reward ratio weak.
It would be interesting to see a Gaussian curve on Martela from Inderes. The upside potential, if successful, is clearly more than the current full downside risk of 0.80 euros. After all, your target price was 5 times higher a couple of years ago. If someone can be made interested in the company, even an American, then 20 million would not be a surprising price at all. Most likely, at least Steelcase’s price would rise, as they got it cheap
00:00 Introduction
00:15 The entire market is on its knees
03:35 Industry restructuring
05:30 Potential merger with Isku
07:03 Financing risks and potential arrangements
12:25 Operational leverage is significant
14:19 Share’s risk profile intolerably high
Although I can’t say I actively follow Martela, I noticed the claim made in connection with the “Valuation” sections regarding the DCF model’s impact on valuation: “DCF model indicates a slight downside.” I understood that the DCF model is mainly illustrative because it doesn’t account for the effects of the IFRS16 standard, but if the model’s value is €0.2/share, and the share price at the time of the report was €0.80, that certainly catches the eye Could one really get a “slight downside” from the DCF if IFRS16 was taken into account, and if so, how? Otherwise, the downside to that report’s DCF value would be a hefty -75%
This is also perhaps mainly as a kind of feedback; the dynamics of that DCF could be opened up a bit more in the report if the value deviates so sharply from the share price
I don’t think speculations about the order are particularly fruitful here, but generally, financing solutions are likely sought according to the pecking order theory, with debt capital first. Consolidation would be very welcome for the industry, but unfortunately, there isn’t really a player in the field whose balance sheet would enable it, nor are private equity investors particularly active in the industry in Finland. Framery is, of course, in a PE portfolio, but I don’t believe they plan to expand into broader product portfolios and services. An Isku Martela merger has long seemed like a possible outcome, but unfortunately, the companies’ balance sheets have weakened to a level where a merger would not eliminate short-term financing problems. Regarding industry profitability, the withdrawal of players / reduction of their own business is certainly one driver for improving the competitive situation, but so far, decreased demand has nullified the effect of these actions in recent years.
It would certainly be interesting, and optionality naturally exists, but in my opinion, this positive tail already relies too heavily on factors external to the company (surviving liquidity risk, improvement of the competitive situation e.g., through competitor exits or structural arrangements, mergers, and acquisition offers). Modeling all of that would make for an interesting intellectual exercise, but I don’t think such an exercise would change the overall valuation picture for this stock. The long-term return on equity has, however, been less than one percent; subsequently, the Nummelan property has been sold and leased back, and the current balance sheet-based valuation is at a clear premium to equity. Relating enterprise value to invested capital provides a more stable multiple for this comparison, but it tells the same story… Of course, the outlook for profitability can change quickly with industry structural arrangements, but we will take that into account if/when they materialize.
Uh, that part clearly remained unupdated. In all honesty, I had the report ready on Friday, but certain parts quickly became outdated with the profit warning. I updated that to a significant downside.
When done well, both DCF models should give the same answer, so the logic doesn’t shake that. In companies with significant sale and leaseback agreements, the logic of the DCF model simply becomes so complex and error-prone under IFRS 16, so in my opinion, it is more straightforward to model Martela in the “old” way. Rather than the modeling principle, it is significantly weaker Q4 results than previous expectations that penalize the entire model’s value.
DCF is an excellent way to approach the theoretical value of a stock, but it also relies only on one scenario and disregards certain optionality. In my opinion, my base scenario is reasonable for Martela (it naturally requires significant improvement from last year), but it naturally excludes, for example, a situation where competitors would exit, market supply and demand would end up in imbalance in a recovering market, and growth would be significantly faster than my forecasts. Here, one could certainly have modeled several scenarios and thereby sought a weighted average or a range in the style of Solar Foods, but the model no longer reliably bends to them after IFRS 16 adjustments, and in my opinion, the poor risk/reward ratio is also evident from the multiples.
Similarly, DCF does not take into account optionality related to, for example, structural arrangements and acquisition offers, which, however, become significantly more common as market values shrink to the smallest class on the stock exchange. Because of this optionality, I did not want to tie the target price directly to the DCF model’s value. However, this does not affect the overall picture of the view, as we are in any case communicating a clear downside and the recommendation is sell.
Here are Thomas’s preliminary comments as Martela publishes its Q4 report this Wednesday.
Based on the preliminary information provided in January, the weak figures of the report are largely known. Our attention will therefore focus on the current year’s guidance and market outlook. After a weak 2024 and based on comments indicating recovering demand, the company should be expected to perform significantly better this year, which should also be reflected in the guidance.
Thomas has already written comments on Martela’s Q4 results this morning.
Due to a weak demand environment, intensified competition burdened Martela’s profitability in Q4. The weak Q4 figures were already broadly known with the preliminary information provided in January. In its report, the company highlighted that received orders grew by approximately 25% in Q4 compared to the previous year, which, as expected, supports the outlook for the current year. However, the company’s given earnings guidance was a slight disappointment, as achieving a zero result at the operating profit level is, in our estimation, not enough to turn the current year’s cash flow positive, which increases the financing-related risk.
The weak year-end, characterized by subdued demand and intensified competition, was largely known following Martela’s preliminary information released in January. The current year’s guidance, supported by an increased order book, as expected, paints a picture of improvement, but due to weak profitability and balance sheet position, the stock’s risk/reward ratio remains poor at the current share price level. We reiterate our target price of 0.5 euros and a sell recommendation.
A couple of takeaways that caught my eye from the CEO’s review linked by @Sara_Antonacci (For those interested in Martela, I recommend watching the whole video!):
Development of the furniture market in Martela’s key target markets in recent years and the current year’s forecast. Considering the sharp drop in recent years, the current year’s forecast seems even cautious to me, but understandably, the forecast risk is certainly elevated, especially due to the uncertainty caused by the trade war. As a reminder, according to Martela
A bit of a breakdown of the previous year’s market-specific development.
The amount of remote work has trended downwards year after year since 2020, but is still clearly above 2019 levels among those who responded to Martela’s work environment survey.
Amount of remote work in Finland elevated compared to the rest of Europe
Examples of the company’s public references:
According to Ville, large office projects kicked off in the latter half of the previous year.
Focus areas for 2025:
Could one really get a “slight downside” from the DCF if IFRS16 was taken into account, and if so, how? Otherwise, the downside to that report’s DCF value would be a hefty -75% 
