Morningstar | KNEBV Updated Forecasts and Estimates from 10 Apr 2019
Kone's four-quarter and full-year results were in line with our forecasts for revenue and EBIT. Revenue grew 6.5% in the quarter, roughly in line with the 6% growth for the first nine months. As expected, the fourth-quarter EBIT margin improved sequentially due to earlier price increases to cover raw material cost inflation. The fourth-quarter EBIT margin was flat year over year, while the full-year margin was down 140 basis points, with raw material prices accounting for about 100 basis points of contraction on the full year. Kone gets roughly 25% of its revenue from China, and the strength of the renminbi versus the U.S. dollar knocked another 40 basis points off the EBIT margin. The commodity and currency fluctuations are temporary and nonoperational; we forecast EBIT margin improvement in 2019. Kone, like others, has been giving a more cautious outlook for 2019, hedging guidance against a turn in the cycle. For the full year, management's guidance is in line with our forecasts, giving us no cause for adjustment. We are maintaining our wide moat rating and EUR 42 fair value estimate. The shares look fairly valued at current levels.The property market in China is probably the most important driver of the company's performance. New floor space additions have been lower in the past couple of years, and the Chinese elevator market grew slightly in units in 2018. However, Kone expects the market to be stable to down slightly in unit growth in 2019.
On a currency-neutral basis, 2018 group revenue grew 6%. Management's guidance on 2019 currency-neutral revenue growth is quite wide at 2%-7%, a 500-basis-point spread, versus no range given at the beginning of 2018, reflecting management's greater uncertainty. We are at the lower end of the revenue growth guidance range at 3%, which we think is sensible, given other indications of a moderately weaker outlook for 2019 from other management teams in our coverage as well as some weaker economic indicators.
KONE is an elevator and escalator industry group based in Finland. Co. is engaged in the provision of products and services for the installation, modernization and maintenance of elevators, escalators and automatic building doors. Co. provides its products and services throughout the entire lifecycle of the equipment, beginning from the installation of new equipment to the maintenance and modernization during their lifecycle and the full replacement of the equipment. Co.'s customers are active in industry segments such as residential, office, retail, public transportation, hotel, hospital, and marine.
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