Norrhydro - Provider of Energy-Efficient Hydraulic Cylinders

[Mikael_Maijala]

CEO Yrjö Trög’s thoughts in Paul’s interview

Norrhydro’s revenue development remained weak, in a challenging demand environment. Despite the uncertainty, the company expects revenue and reported EBITDA to grow this year.

Norrhydro H2’24: Kysynnän osalta haastava loppuvuosi - Inderes

Topics:
00:00 Introduction
00:17 Year-end summary
01:27 Sustainability of the current cost structure
02:34 Current financial position
04:14 Background of the guidance
05:31 “Competition is very tough”
06:55 NorrDigi’s key growth drivers
08:43 NorrDigi EMA’s situation
09:13 Strategic partners

[Pauli_Lohi]

Apparently, there are no technical conditions in the waivers, but I believe that at this point, financiers have the power if they explicitly wanted the company to be recapitalized further. It sounded like the outlook for growth and profitability until 2025 is positive due to customer-specific order prospects and better than the end of 2024. For example, Ponsse’s strong orders in Q4 may positively affect the outlook, even though Norrhydro did not specifically mention this by name.

Already in H2, operating cash flow was positive, but investments pulled free cash flow to zero. The decrease in cash was mainly due to debt repayments. Therefore, I would not see a share issue as inevitable if we are moving from neutral free cash flow to slightly positive (assuming the positive guidance holds). According to the company’s own words, various financing solutions could be considered to accelerate the growth of new products (applications include, for example, sales and the construction of customer-specific prototypes in addition to existing ones).

I got the impression that sales of new products are indeed starting, but their impact on overall growth will be quite small in the near future, and profitability will not be particularly good in the initial phase, as new types of production need to be ramped up. The 2025 outlook is therefore mainly dependent on traditional business.

[Sijoittaja-alokas]

Pauli has prepared a new company report on Norrhydro right after H2.

The H2 report fell short of expectations due to weak demand, although on the other hand, the streamlining of the cost structure improves the short-term earnings outlook, provided that demand recovers. High indebtedness amplifies the reflection of changes in earnings expectations on the share price and, at the same time, increases the risk level. Considering the shift of NorrDig’s growth forecasts further into the future, as well as uncertainties related to the short-term financial position, we lower our recommendation to reduce (previously add) and the target price to 1.50 euros (previously 2.1 €).

Norrhydro Group H2'24: Taseen tila ja arvostus asettavat riman korkealle -...

[anttirs]

The estimate for revenue development for 2025e has been quite conservative if revenue really grows ‘only’ 10.6%. Customer order backlogs: Ponsse +12%, Metso +13%, Cargotec +3%, Kalmar +20%, so the bottom is probably behind us now (at least for now ). Well, let’s hope that revenue would still grow by a good 15%.

I don’t believe that dividends will be paid starting from 2027, nor do I hope for this. If I hope for anything, it’s for shareholders to vote against this for at least a few years. If business is good, then investments should now be directed towards growth. If business is not good, then the focus must be on paying off high-interest loans. It doesn’t seem sensible to pay dividends this decade in really any situation. Let the kitchen renovators sell their shares, and leave the business alone.

Finally, a question: has Volvo’s excavator exclusivity now ended? Wasn’t it originally until the end of 2024.

[Pauli_Lohi]

Yes, the customer order backlogs you mentioned support growth. Our forecast is not very far from the average order development of the companies you mentioned. At the same time, the revenue guidance for our most important customer, Ponsse (estimated 25% share of revenue), for 2025 is quite cautious (Inderes forecasts 3% growth), which affects our forecast for Norrhydro.

Assessing the 2027 dividend is still challenging, and I don’t have a strong view on it. The company paid a dividend for 2022 (0.06 euros), even though indebtedness was already high then. I would be inclined to agree with you that postponing dividend payments could still be justified in 2027 if net indebtedness is over 2x in relation to EBITDA (our forecast 2.1x 2027e).

I don’t have new information about possible changes to Volvo’s excavator exclusivity. Erkki’s comprehensive report mentioned “until commercialization.” I could discuss this with the company when I likely visit them in Rovaniemi during the spring. On the other hand, the end of exclusivity would hardly mean immediate new development projects with competing manufacturers. This is influenced by Norrhydro’s scarce financial resources, which new development projects require, and also by the still relatively early stage of commercialization work with Volvo.

[anttirs]

I looked up those percentages from the parent companies’ Q4 reports

[Ensse]

As someone who doesn’t understand much about accounting, I was reading today’s annual report and the amount of rent, which has increased quite dramatically during the year, caught my eye. Or will it only increase next year? Because it states there the amount of rent payable in the next financial period?

And is the “Total liability under the lease agreement” mentioned in the financial statements the total amount paid over the entire lease term, i.e., 15 years?

https://storage.googleapis.com/inderes-widgets-prod-assets/norrhydro/attachments/26adda59-83d5-4cf7-ba7d-51dd828849b5/norrhydro-vuosikertomus-tilinpaatos-2024-11-3.pdf here’s also a link to the annual report where it can be found

[Mosku1]

Those earlier Inderes publications ‘on the verge of a growth leap and the near future secured’ (Norrhydro Group) now seem like careless publications from a small investor’s perspective and are proving costly?

[Housumies]

@Mosku1

Inderes’s previous publications “On the Threshold of a Growth Leap” and “Near Future Secured” (Norrhydro Group) now seem like careless publications from a small investor’s perspective and are becoming expensive?

Could you elaborate a bit more on what you mean by carelessness and what is becoming expensive here?

I checked the analyst’s comments on those publications, and in the “On the Threshold of a Growth Leap” publication, the recommendation was sell when the share price was EUR 4.14, and here is a quote from the analyst’s reasoning:

“Because Norrhydro consists of two businesses with very different outlooks (traditional hydraulic cylinders and NorrDigi), we primarily value the company using a sum-of-the-parts model, but also a DCF model. Our sum-of-the-parts model gives the share a value of approximately 3.5-3.6 euros, with an average of 3.6 euros/share. Over 80% of the sum of the parts belongs to the traditional hydraulic cylinder business, which is easier to value. Our DCF model indicates a fair value of approximately 3.6 euros for the share. The share’s return/risk profile is unfavorable in the shorter term, as an increase in expected return above the required return would necessitate significantly better-than-expected earnings development in 2022-2024.”

In the “Near Future Secured” publication, the recommendation was reduce when the share price was EUR 3.77, and here again is a quote from the analyst’s reasoning:

“Norrhydro as an investment requires patience from the investor. Before successful ramp-up of production in the new factory and clear visibility of NorrDigi deliveries in the company’s numbers, positive drivers are key to maintaining confidence and the share price. In the short term, there may still be a shortage of these, even though the increase in revenue guidance was a positive surprise. The average of our sum-of-the-parts and DCF calculations indicates a value of 4.2-4.3 euros for the share. The total expected return of the share, however, is negative with both 2022 and 2023 multiples, and even with the 2024 multiple, it remains below our required return. In our opinion, relative valuation works quite poorly for Norrhydro with group numbers, as the multiples for 2022-2023 are clearly above the median of its peers.”

In my opinion, Erkki was indeed right in those recommendations, in hindsight, regarding the unattractive risk-reward ratio, and for the company, the risks materialized as the cylinder market collapsed while the new factory was brought into production readiness.

[Mosku1]

It just makes me think, when reading the background information I’m referring to: the Savo people’s stories, where the responsibility always falls on the ‘listener’ – that was indeed warned about somewhere.

54 MEUR by 2026, so could it perhaps still be pulled together with additional funding/some corporate arrangements?

[Pauli_Lohi]

Good catch! I inquired about the matter from the company. Apparently, the lease agreement has a higher rent for the years 2025-26, after which it returns to a lower level. I was not aware of this increase when making the latest forecasts. In our model, the growth in other operating expenses and personnel expenses totals EUR 0.4 million in 2025 and EUR 0.9 million in 2026, which includes assumed growth in personnel expenses due to increasing production volumes. It can thus be concluded that achieving our forecasts is more challenging in light of current information due to the increase in rent expense. However, the biggest variable on the cost side is gross margin, whose “normalization” closer to the 50% level would, in a favorable scenario, clearly be sufficient to cover that increase in rent expense. In our forecasts, we have a more cautious, but still upward-trending 47.5-47.9% for 2025-26 (2024: 45.8%).

Additionally, it should be noted that lease liabilities include payments for the entire remaining lease term (15 years minus something).

[Housumies]

@Mosku1

Somehow it just comes to mind, when reading the background information I refer to: the stories of the Savonians, where the responsibility always remains with the “listener” – it was warned about somewhere.

“On the Threshold of a Growth Leap” - a quick glance at the extensive report revealed at least a couple of pages on the company’s risk profile:

So, in my opinion, the materialized risks: the melting of the cyclical market and the debt burden and difficult financial position after the new factory investment, are prominently mentioned there.

@Mosku1

54 meur revenue 2026, so maybe it could still be arranged with additional financing/some corporate restructuring?

It would help here too if you could say which report mentions this 54 meur revenue for 2026? I looked through old extensive reports, and at least in the extensive report published on May 30, 2023, 55 meur revenue was forecasted for 2026. If I remember correctly, at that time, the demand outlook for the cylinder market was still quite good. Do you have any justification for why that revenue forecast would have been careless given the outlook at that time? In my opinion, to maintain a good discussion culture, criticism of analysis, e.g., for carelessness, should be justified with something more than just a hunch. Especially in a cyclical growth company, it’s also good to remember that making revenue forecasts many years into the future is pretty much a gamble; analysts are not psychics, and expecting that from them is, in my opinion, unreasonable. That’s why I call for the quality of the analysis to be commented on with good reasons, especially considering the outlook at the time the analysis was made.

[Mosku1]

[Mosku1]

[Ituhippinen]

Isn’t this 54m revenue in 2026 the company’s own target, and it has nothing to do with the quality of Inderes’ report?

As stated in the image you provided,

\u003e Assessing NorrDigi’s growth targets is difficult for this reason, and due to uncertainty, our own revenue forecasts are quite clearly below the company’s own target.

No one is a prophet, but they have been quite well on top of the market challenges (risks linked above).

[Mosku1]

So, I guess those can’t be blamed on Inderes, but they are a bit misleading anyway. Who, I wonder, is responsible for the quality of the content of those reports/marketing materials? The investor, who needs to understand and filter the content sufficiently to make correct conclusions. Let’s monitor the situation😊

[Mosku1]

The market for traditional cylinder business is limited, and from whom that market share is taken and by what means. Iron machining and materials do not give much room to be superior. A debt-free company can push down the price level, but otherwise, at least in Finland, manufacturers are probably on the same level: Hydroline, Wipro, Hydoring, Norrhydro,…

[Mosku1]

When one browses the valuation tables of those company reports, and if Inderes estimates the stock’s valuation (20.4.2022) at 3.77 eur for 2025, and now in the corrected report (21.2.2025) at 1.48 eur, then there’s a huge discrepancy. At least from a layman’s perspective.

“The disclaimer then ensures the report’s immunity from liability”

Good analyses, but has the analyst been tricked by Norrhydro in those initial data/forecasts, as if taken for a ride in some sense🤔

[mikkojuhani]

There has been quite a lot of headwind along the way in the economic and global situation. The commercialization of products has been surprisingly slow. Now that things haven’t gone nearly as planned in 2022, the company has found itself in a financial situation with very little room to maneuver. That tight financial situation, of course, pushes the stock price down, because the stock will soon be diluted if the financial situation doesn’t improve soon. I don’t know what kind of oracle one would have had to be to have been able to predict all this? Surprises are part of investing.

[KepposSeppo]

Wondering about stock price changes doesn’t really belong in this thread, but is there anything known that has strongly raised the stock price in recent days? Or is it just Germany’s investment package and Norrhydro as a potential beneficiary? I’ve been wondering what’s driving this up now.