KION Stock: Is Recovery Halted? I Say No (OTCMKTS:KIGRY)

Dear readers/users,

KION (OTCPK:KIGRY) seemed on the verge of “breaking out” just a few months ago. It had gone over €42/share and we seemed to be in a position where the market was open to recognizing that it had, for a long time. time, underestimated this industrial game.

Then, however, the company reversed – and now we’re down to around €35/share. This is still well above the sub-€30/share where I bought it. But a legitimate question we’ve been getting in recent weeks is whether KION’s thesis and advantage is broken, and the time has come to take what profit we can and run. After all, the company’s performance is poor to say the least. It needs to be reversed before we can even consider it acceptable in this interest rate context.

So what is it do you keep me in this investment?

In this article, an update to my previous article found here, I’ll show you why I think KION’s case hasn’t changed – why the edge is still there, and why I think KION is likely to outperform over the next few years, with potential rates of return over 200%or 59% per year, and why I am not selling anything – but rather thinking about adding more to “fill” my position in the company.

KION – Why are we going back down?

So, first questions. Why exactly are we down from over €42/share and back to €35/share, where are we today as I write this article?

The answer can be found, at least in part, in 2Q. Despite significant improvements in profitability – which we forecast – there was weakness in annual revenues – which we did not forecast. Order intake fell 8% year-over-year, leading to lower EPS trends year-over-year.

If you remember – KION contains two segments, SCS and ITS. The SCS segment remains somewhat in the black and is the cause of the company’s near-term problems, while ITS has seen seasonal improvements in order intake. On the other hand, SCS is the segment that is seeing an increase in its margins, while ITS is the segment with some margin pressures and issues. This dynamic between the two segments results in uncertainty among market participants regarding the near-term future of this company, which I interpret as the driving factor behind this development.

However, I must point out that this is just a bump in the road. Even if you were to overstate the company’s development here, the argument for a structural decline in KION as a result of this simply does not exist. I still think the 2024E will deliver substantial top- and bottom-line improvements on a year-over-year basis – and there’s plenty of reason to expect positive trends going forward.

The company’s financial update shows that KION is successfully raising product prices with solid results in ITS. APAC and specific types of equipment took up more of the sales mix, and even with a slight decline in new orders, the company’s order books remain well-filled. Even without substantial order books, part of KION is a service-oriented business, and service revenue increased by 3%, while the new truck business remains fully positive and stable.

The arguments to be made for a catch-up on an annual basis are many. The EBIT margin increased by more than 100 bps on an annual basis and is again above 10.5%, heading towards the level of 11%. ITS is by far the higher margin segment, but margin improvements have been seen in both segments, not just ITS. SCS posted a margin increase of over 200 bps YoY and over 50 bps QoQ. That alone should have offset the decline we see here more than it did.

But it’s my interpretation that the market is focused on top order intake here – continued macro uncertainty resulting in smaller orders, or uncertainty at the order level, which in turn causes them not to sign new major, or even small, contracts.

This led to a 27% decline in business solutions (sub-segment in SCS), with customer services down 16% year-on-year. This is also compounded by the company’s focus on legacy projects here and relatively low order intake in recent quarters.

But again, I think the market is missing and there are clear reasons for the company’s current weakness. Even though the company order level improvements and earnings level improvements will only be half of what forecasts currently expect it to bethat will still mean the company is incredibly undervalued at today’s price.

And I don’t think the forecasts are going down by 50%.

Other reasons for the things and trends we see here?

There are a few small line items in the quarterly P&Ls – an intangible impairment and some NRI, but none above even €50 million, which for a company of this size makes it relatively limited in scope.

Also, let’s focus for a moment on cash flow.

Where you can see, yes, the improvements are indeed materializing. The company’s debt fundamentals are also seeing significant improvements thanks to EBITDA increases. What we see is a net industrial debt of 1.8x with a global net financial debt of 0.7x or a total of €1.2 billion. This is nothing or a company like that.

Here are the company’s current forecasts for both segments.

And this, to be clear to you, I think is the last remaining reason why I suddenly dropped over 10% in a relatively short time. The market was expecting a recovery that was stronger in 2024-2025 – and it’s not getting it. For that, I think a slight drop is warranted. But a drop to that level is not something I see as warranted given what we’re seeing here in terms of upside. The two segments of the company – Industrial trucks and supply chain services and solutionsremain an integral part of the world, and the company is a market leader in one and among market leaders in the other.

Because of this, I think the market is exaggerating the downside, and I think the upside is now even clearer than before.

KION – The upside here is at least over 30% per year as I see it.

In my last article here, I made a change to my KION thesis and I no longer saw it as cheap. Back then the company was trading above €45/share, which is no longer the case. The company is now trading below €36/share.

This allows us to add and I will probably take that opportunity in the next week and add to my position.

KION is now trading down at 11x P/E. This is compared to a 10-20 year P/E average of over 21x P/E. The yield is currently poor – only 2%, although I believe this will improve significantly. KION for me remains a potential long-term portfolio type with a BBB credit rating. In fact, I think given the low leverage it should be higher – but that could change. The company, after all, only has 37% long-term debt/cap.

At this valuation, the company could continue to trade at 10x P/E despite forecast EPS growth of 21% on average over the next 3 years as it recovers from margin lows (And these margin recoveries are confirmed)and still generate 20.19% per annum.

And remember, I’m incredibly conservative, which is why this is pretty much my PT and expectations. But we have to admit that this company could go much higher. For KION, I think it’s entirely possible given the expected earnings growth that 15-20x P/E comes into play – because that’s where the company actually tends to trade traditionally.

If this happens, then we are not talking about “only” 20% per year, although that is an amazing RoR – we are talking about more than 40-50% per year, resulting in triple digit rates of return.

And remember, none of these ask the company to do something less or something noteworthy that hasn’t happened before. As you can see, I was at that assessment for 2023-2024 not too long ago. So it’s easily something that could happen again.

The prospect of a triple-digit native share price for KION is not a ephemeral notion – it is a reality, if the company manages expansion, based on industrial recovery, which I believe will happen sooner or later. The only reason not to enter here, in my opinion, is if you think industrial recovery is unlikely at any point in the next 3-5 years. Then there might be alternative investments with better advantages to be made.

But other than that… I think the case is very clear here.

I think KION AG has clear potential to outperform the average here, and for that reason I’m ignoring the weak return and betting on a longer-term position – at least 2-4 years – waiting for a recovery to take place.

My thesis on this company is now as follows.

thesis

• KION Group is an attractive capital goods play with a focus on intralogistics solutions, automation and warehousing technologies – things like forklifts, to put it simply. The upside for 2024E is very much there, with the company now falling back below €36/share.

• The company is undervalued and forecasts imply significant upside over the next 5 years with upside of over 100-200% – and that upside and undervaluation is still very much there.

• KION is a “BUY” with a price target of €80/share, updated for 2024E, but I’m not trading it any further at the moment, even though a rise above €120/share is certainly possible in a optimistic context. Because of that, I say the company is a very good prospect here if you’re willing to put up with a low yield.

Remember, I mean:

1. Buying undervalued companies – even if that undervaluation is slight, and not extremely massive – at a discount, allowing them to normalize over time and collecting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and into overvaluation, I take profits and rotate my position into other undervalued stocks, repeating #1.

3. If the company is not overvalued, but is at a fair value or falls back to undervalued, I buy more as time allows.

4. I reinvest dividend income, job savings, or other cash inflows as specified in #1.

Here are my criteria and how the company meets them (in italics).

• This company is generally qualitative.

• This company is fundamentally safe/conservative and well managed.

• This company pays a well covered dividend.

• This company is currently cheap.

• This company has realistic upside based on earnings growth or multiple expansion/reversion.

That means the company still meets all my criteria for attractive valuation-oriented investments. I’m still at “BUY” and now I’m calling it cheap again.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.