Solwers: Challenges have surfaced late in the year

Translation: Original published in Finnish on 02/03/2025 at 08:25 am EET

According to preliminary data released by Solwers on Saturday, the company's final quarter of 2024 has been weak earnings-wise. We believe some of the factors behind this weak development are related to a rather weak operating environment and, therefore, probably temporary. On the other hand, recent economic news flow does not support expectations of a rapid recovery in market activity. Reflecting our estimate changes, we lower our target price to EUR 2.8 (was EUR 4.20) and our recommendation to Reduce (was Accumulate). We feel the high valuation of the share, coupled with the increased indebtedness creates a weak risk/reward ratio over a 12-month horizon.

According to preliminary data, Q4 has been challenging

Solwers issued preliminary data on its Q4 development on Saturday, as the company stated that its IFRS operating profit is lower than could be reasonably concluded from its previously published information. In addition, the level differs from the consensus forecasts. According to unaudited preliminary data, Solwers’ Q4 revenue is 21-22 MEUR (Q4’23: 19 MEUR) and its IFRS operating result (EBIT) is close to zero (Q4’23: 1.45 MEUR). According to the company, revenue development has been hampered by the low number of billable hours and tight price competition. In addition to these factors, the result has been burdened by non-recurring items, such as changes in earnout payments, write-downs of uncertain receivables, and preparations related to the potential transfer to the main list.

We estimate that intense price competition stems from generally weak demand in technical consulting and design, resulting in some operators seeking to secure billable work for their staff by cutting prices. We believe Solwers has not engaged in this price competition, which, together with the timing of the holidays in December, has reduced billable hours. Since the company’s cost structure largely consists of wage costs that do not fluctuate with revenue, a drop in revenue is quickly reflected in the result. We suspect the situation regarding these factors will ease once economic growth and investments pick up. However, we have to wait for this, as there are no clear indications of it in sight so far.

We cut our estimates clearly

We have cut our Q4’24 forecast to line with the preliminary data. Thus, our forecasts decreased clearly, as before the preliminary data, our forecast for Q4’24 revenue was approximately 23.4 MEUR and EBIT around 1.4 MEUR. We feel the recent economic news flow does not support a quick recovery in the market situation, which is also reflected in our lower revenue forecasts. Our EBITDA estimates for 2025-2026 decreased by 10-15%, but due to high depreciation levels and financing costs, the leverage in lower income lines and cash flow is strong. Reflecting this and the negative free cash flow during H1'24, we pay special attention to the development of cash flow in late 2024 in the financial statements (February 27).

Operational estimate changes hit the bottom lines with force

With our 2024-2025 estimates, EV/EBITDA ratios are 9x and 8x, which are reasonable. However, relative to the operating profit level, high depreciation and net financial expenses significantly erode earnings (and cash flow), resulting in P/E ratios of 55x and 20x for the respective years. Thus, the earnings-based valuation is high as a whole. Together with the increased indebtedness caused by the weakened profitability (2025e net debt/EBITDA 3.3x), we believe this turns the risk/reward ratio weak, even though the company's earnings potential is, in our view, higher than the short-term development.