KNYJY - KONE: Completions And Supply Chain Letups Drive Revenues

2023-09-15 10:30:47 ET

Summary

• KONE Oyj Q2 results show strong sales driven by modernization and new equipment revenues.
• The company implemented successful cost control and reorganization plans, leading to a great profit result, that should continue to bear fruit.
• Expectations for future sales growth are muted due to major difficulties in China business development, but net income growth is expected to continue.
• While the multiple is very high, it is fair. KONE has always been top quality.

KONE Oyj ( KNYJF ) (KNYJY) looks decent as always , hence the high valuation that continues perennially. This quarter, it was actually not the blades that drove revenues but razors, with fatigued demand coming from China as developers push for inventory completions. Also, comp effects related to supply chain letups allowed revenues to lift. Orders, however, are falling overall, driven heavily by China and to a lesser extent America. Europe is doing more stably. Still, leading indicators look decent in the U.S., even if things look grim in China.

Q2 Breakdown

Interesting dynamics in Q2. APAC sales were actually pretty great, despite the pressures on China's economy and housing market. Modernization and new equipment revenues in general drove the sales results. There were several reasons. The first is difficult comps due to the supply chain issues and China closures last year. The second is that the difficulties in the Chinese property markets means that developers are desperate to complete and deliver builds to improve their liquidity situation.

In new equipment, the growth was 18.5%. As Henrik already highlighted, maintenance grew very strongly at 9.8%; and maybe again the highlight of the quarter, as was the case also in the first quarter, is the very strong sales development in modernization, growing at 24.8%.

Ikka Hara, CFO of KONE.

Net income is being excellently preserved by management. Note first the meaningful deleveraging to deal with rising debt costs.

They also implemented over the last 6 months a successful cost control and reorganization plan. New orders coming in, despite some declines in new orders driven by China, are at higher prices, and general cost control in the face of growth shows with limited cost increases as sales increase . Structural changes helped as well. Great profit result.

Bottom Line

The results are strong, but orders are coming down and weak comps have helped. There are expectations of new equipment declines, which this quarter were a huge boost to sales. Modernization and maintenance revenues are expected to continue to be strong, but sales growth is going to go rather mute. Margin improvement should continue though, both from mix and structural effects related to the cost improvement plan as well as better pricing on soon-to-be-delivered orders - net income should continue to grow. That's the benefit of the razor and blades elevator business model. Still, China is a pretty big concern on the sales side and will drag.

Americas hasn't done well in terms of orders, but that could change based on leading architectural indicators. Probably why Buffett is also making his bets on homebuilders.

KONE Oyj is at 23x P/E. It's expensive, but it's a fair price given its scope to grow net income, pricing power and resilient underlying business model. Still, not the sort of stock we're interested in. There are tighter deals out there. This is just too high profile and a knee-jerk pick when concerned about the markets. Obscure deals with similar economics exist out there.

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