Sitowise Q2'24: Results on a runaway train

This report is a summary translation of the report “Kauas tulokset karkaavat” published on 8/13/2024 at 7:22 pm EEST.

We lower Sitowise's target price to EUR 2.50 (was EUR 2.70) and reiterate our Reduce recommendation after the company’s Q2 result. Sitowise's challenges are partly market-driven, but attention is also increasingly turning to the company's own performance, particularly in view of the ongoing challenges in Sweden. The weak result and the prolonged market turnaround have also put a strain on the company's financial situation. Given the risks to the business and the uncertain turnaround, we now see the stock's risk/reward ratio as weak.

Q2 result weak in line with preliminary data

Sitowise's revenue decreased by 10% to 50.9 MEUR in Q2 (Q2'23: 56.5 MEUR), continuing the downward trend that started last year. Organic revenue was down by as much as 13% in the quarter. Due to weak revenue, low utilization rates and the challenges in Sweden, the result was also significantly down year-on-year. Adjusted EBITA declined to 2.6 MEUR in Q2 (Q2’23: 4.5 MEUR) and the margin decreased to 5.0% (Q2’23: 8.0%). The profitability is poor, considering that the performance was supported by one working day more than in the comparison period (positive impact of around +0.8 MEUR). The order book was down 7.5% year-on-year during the quarter at 162 MEUR, reflecting the still weaker outlook, especially for the building construction market in Finland and Sweden.

Forecasts for the next few years down by around 10%

Due to the company's challenges in Sweden and the prolonged market softness, we lowered our operating profit forecasts for the coming years by around 5-10%. In 2024, Sitowise expects a decrease in revenue (2023: 211 MEUR) and that its adjusted EBITA margin will be below the level of 2023 (2023: 8.1%). In 2024, we now expect revenue to decrease by 7% to 195 MEUR and adjusted EBITA to decrease to 13.4 MEUR (2023: 17.0 MEUR), corresponding to a margin of 6.9%. In H2, the increase in the number of working days should support the company's growth and earnings, but earnings will be low due to market weakness, low utilization rates, and cost pressures and challenges. As the market eventually turns and utilization rates improve, we expect earnings levels to rise towards their normalized level in 2025-26. We estimate that current profitability is below Sitowise's potential (EBITA-%: +10%), but reaching this level is increasingly out of reach and will require tackling challenges in Sweden and stronger market traction. In our view, the risks to the business from growth challenges and the integration of acquisitions have partially materialized, adding to the uncertainty surrounding the company's potential.

High valuation relative to risks

Sitowise's valuation in 2024 rises to a high level due to its weak earnings performance, and we are already focusing on the valuation for the next few years. If the profitability turnaround and market recovery materialize as expected, the multiples for the next few years will fall significantly (2025-26e avg.: EV/EBITDA: 6x, P/E: 11x), reflecting the company's potential. However, uncertainty about the pace of market recovery keeps forecast risks still elevated, which is why we are now leaning towards the lower end of our acceptable valuation range (previously mid-range). Based on the 2025-26 estimates and the valuation range we accept (EV/EBITDA: 7x, P/E: 12x), the stock would not have any significant upside. Even the dividend yield does not support the expected return in the short term, as we have also reduced the dividend for 2024 to zero. Sitowise is now trading at a discount (15%) to the 2025 valuation of its peers, but even this would not signal significant upside. The DCF is higher than the share price (EUR 3.2), but the current lack of earnings growth and weak market performance do not encourage relying on far-off potential.