Solwers H2'24: Increased investment activity is key

Translation: Original published in Finnish on 2/28/2025 at 7:35 am EET.

Solwers' H2 figures did not contain any element of surprise given the preliminary data. However, the now sluggish profitability reflects the criticality of revenue growth, which is also a prerequisite for strengthening cash flow and thus the financial position. Relative to the subdued near-term earnings level, the valuation of the stock is elevated, which together with the financial position now constitutes a weak risk/reward ratio in our view. Therefore, we reiterate our Reduce recommendation and revise our target price to EUR 2.65 (previously EUR 2.80). The Q4 interview with Solwers’ CEO can be viewed here (subtitled in English).

Surprise element reduced by preliminary data

Solwers' H2'24 revenue increased by 17% year-on-year, which was a rough estimate after the company released its preliminary data. This growth reflects the acquisitions made, while given the timing of the holidays and the market situation, we estimate that organic growth was clearly negative. EBITA of 2.2 MEUR was also well in line with expectations, as the company also provided preliminary information on the EBIT level. Beneath the surface, however, the cost structure included significant non-recurring items, at least to a large extent, the largest of which was the positive impact of the release of contingent consideration liabilities. This was offset by write-downs of receivables, the repayment of subsidies received by a subsidiary and administrative expenses, in particular related to the move to the main list. These roughly balance each other out, so that excluding these items, the result would also have been in line with our expectations. However, we estimate that the transfer to the main list and the growth of the group will lead to some increase in the cost structure along with the usual cost inflation. Revenue growth is therefore critical to improving profitability, which has fallen to a sluggish level. It is also critical for the company's cash flow, as the free cash flow for 2024 remained at only 0.7 MEUR, reflecting high net financial expenses and lease liabilities (premises expenses) relative to cash flow from operating activities.

Growth is key to improving profitability

In its outlook, Solwers expects to benefit from the general market upturn, which is expected to strengthen towards the end of the year. Our understanding is that the order books of the group companies are above the comparison period and that project starts in the sectors driving demand are also picking up. Nevertheless, in line with the level of activity, we expect price competition to remain tighter than usual this year, but for the market to strengthen next year in line with economic developments. We have made only minor refinements to our forecasts for revenue and operational profitability. We forecast the company's revenue to turn to organic growth in H2 of the current year. Therefore, the increase in revenue combined with the decrease in costs will increase our EBITA forecast to 6.3 MEUR in 2025 (2024: 5.5 MEUR). We expect earnings growth to accelerate in 2026, driven by demand-driven increases in invoicing rates and efficiency improvements. The main risk to the forecasts is the development of overall investment activity, which should be supported by falling interest rates but is vulnerable to possible changes in the geopolitical and macroeconomic situation, among others.

Value increase requires earnings growth

The valuation of the stock is high (2024 P/E ratio ~22x) given the actualized weak 2024 results.  With the earnings growth we forecast, the P/E and EV/EBIT multiples for 2025 and 2026 are around 15x and 11x, and around 15x and 12x, respectively. The valuation multiples for the current year are quite high, while the 2026 projections show a somewhat neutral valuation in our view. Relative valuation paints a similar picture. This reflects the fact that the increase in share value requires faster earnings growth than we forecast. As a result, we feel that the current valuation level of the share, coupled with the increased indebtedness, creates a poor risk/reward profile.