KION Stock: Is The Recovery Broken? I Say ‘No’ (OTCMKTS:KIGRY)

Victor Golmer Dear readers/followers, KION (OTCPK:KIGRY) seemed on the verge of “breaking out” only a few months back. It had moved above €42/share, and we seemed to be in a position where the market was open to recognizing that it had, for a long time, undervalued this industrial play. Then, however, the company reversed back down – and now we’re down to around €35/share. This is still well above the sub-€30/share where I bought it. But a justified question I have been getting over the past few weeks is whether KION’s thesis and upside are broken, and the time has come to take what profit we may, and run. After all, the company’s yield is meager, to say the least. It needs reversing before we can even consider it borderline acceptable for this interest rate context. So what is keeping me in this investment? In this article, an update on my previous article found here, I’ll show you why I believe that KION’s thesis hasn’t changed – why the upside is still there, and why I believe KION is likely to outperform over the next few years, with potential rates of return upwards of 200%, or 59% per year, and why I’m not selling anything – but rather am considering adding more to “fill” my position in the company. KION – Why are we going back down? So, first questions first. Why exactly are we going back down from over €42/share, and back down to €35/share, where we are today as I am writing this article? The answer can be found, in part at least, in 2Q. Despite significant improvements in profitability – which I forecasted – there was some YoY revenue weakness – which I did not forecast. Order intake was down 8% YoY, which led to a decrease in YoY EPS trends. KION IR (KION IR) If you recall – KION contains two segments, SCS and ITS. The SCS segment remains somewhat lumpy and is the cause for the issues faced by the company short term, while ITS has seen seasonal improvements in its order intake. On the other hand, SCS is the segment 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 market participant uncertainty regarding this company’s near-term future, which I interpret as the driving factor behind this development. However, I need to point out that this is just a bump in the road. Even if you were to over-interpret the company’s development here, the case to be made for a structural decline in KION as a result of this just isn’t there. I still believe 2024E will bring around substantial top and bottom-line improvements on a YoY basis – and there’s plenty of basis to expect positive trends going forward. KION IR (KION IR) The company’s financial update shows that KION is successfully increasing product prices, with solid results in ITS. APAC and specific types of equipment took 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 revenues grew by 3% while the new truck business remains entirely positive and stable. The case to be made for a recovery on a YoY basis is very much there. EBIT margin increased by over 100 bps on a YoY basis, and is once again over 10.5%, moving towards the 11% level. ITS is the higher-margin segment by far, but margin improvements were seen in both segments, not just ITS. SCS saw 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 focuses on top-line order intake here – ongoing macro uncertainty which results in lower orders, or order level uncertainty, which in turn causes them not to sign major, or even small, new contracts. KION IR (KION IR) This resulted in a Business Solution (Sub-segment in SCS) decline of 27%, with customer services down 16% year-over-year. This is further compounded by the company focusing on legacy projects here, and relatively subdued order intake over the past few quarters. But again, I believe the market is missing and there are clear reasons for the company’s current weakness. Even if the company’s order level improvements and earnings level improvements will only be half of what the forecasts currently expect them to be, this will still mean that the company is incredibly undervalued at today’s price. And I don’t think the forecasts are off by 50%. Some other reasons for the things and trends we’re seeing here? There are some small line items in the quarterly P&Ls – an intangible impairment, and some NRI, but none of that above even €50M which for a company this size makes it relatively limited in scope. Also, let’s focus on cash flow for a moment. KION IR (KION IR) Where you can see, that yes, improvements are indeed materializing. The company’s fundamentals in terms of its debt are also seeing material improvements due to increases in EBITDA. What we’re seeing is an industrial net debt of 1.8x, with an overall net financial debt of 0.7x, or a total of €1.2B. This is nothing or a company like this. Here are the current company forecasts in terms of both segments. KION IR (KION IR) And this, to be clear with you, is I believe the last remaining reason why we’re suddenly down more than 10% in a relatively short time. The market expected a recovery that was stronger in 2024-2025 – and it’s not getting it. For that, I believe a slight decline is justified. But a decline to this level is not something I view as justified given what we’re seeing here in terms of upside. The company’s two segments – Industrial Trucks & Services, and Supply Chain Solutions, remain integral to the world, and the company is the market leader in one, and among the market leaders in the other. Because of this, I believe the market is overstating the downside, and I believe the upside is now clearer even 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 no longer viewed it as cheap. That was when the company traded above €45/share, which is now no longer the case. The company now trades at below €36/share. This allows us to add, and I will probably take that opportunity in the coming week and add to my position. KION now trades back 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 bad – only 2%, though I believe this will significantly improve. KION to me remains a very long-term sort of portfolio potential with a BBB rating in credit. I actually believe that given the low leverage it should be higher – but that might be changing. 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 EPS growth forecasted at 21% on average for the next 3 years as it recovers from margin lows (And these margin recoveries are confirmed), and still generate 20.19% per year. KION Upside Annualized RoR (F.A.S.T Graphs) And remember, I’m incredibly conservative, which is why this is pretty much my PT and expectation. But we need to acknowledge the fact that this company could go so much higher. For KION, I believe it’s entirely possible given expected earnings growth that 15-20x P/E comes into play – because this is where the company actually traditionally tends to trade. If this does happen, then we’re not talking “only” 20% per year, though this is an amazing RoR – we’re talking over 40-50% per year, resulting in triple-digit rates of return. F.A.S.T graphs KION Upside (F.A.S.T graphs KION Upside) And remember, none of this requires the company to do anything less or anything specifically noteworthy that has not happened before. As you can see, we were at that valuation for 2023-2024 not that long ago. So it’s easily something that could happen again. The prospect of a triple-digit native share price for KION is not an ephemeral notion – it’s a reality, if the company manages the expansion, based on industrial recovery, which I believe will happen sooner or later. The only reason not to go in here, in my view, is if you believe industrial recovery to be unlikely at any time in the next 3-5 years. Then there could be alternative investments with better upside to be made. But outside of that…I believe the case is very clear here. I believe KION AG has a clear potential to outperform the average here, and for that reason, I’m ignoring the poor yield and staking a position for the longer term – 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 an emphasis on intralogistics solutions, automation, and warehouse technologies – things like forklifts, to put it simply. The upside for 2024E is very much there, with the company now down again to below €36/share. The company is undervalued and forecasts imply a significant upside over the coming 5 years, with an upside of over 100-200% – and this upside and undervaluation are still very much there. KION is a “BUY” with a price target of €80/share, updated for 2024E, but I am not shifting it further at this time, even if a higher upside of €120/share is certainly possible in a bullish context. Because of this, I say that the company is a very good prospect here if you’re willing to put up with low yield. Remember, I’m all about: Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1. Here are my criteria and how the company fulfills them (Italicized). This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion. That means that the company still fulfills all of my criteria for attractive valuation-oriented investing. I’m still at a “BUY”, and now call it cheap once again. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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