Tietoevry: Mild profit warning was already priced in

Translation: Original published in Finnish on 10/18/2024 at 6:00 am EEST.

We reiterate our Buy recommendation on Tietoevry but lower our target price to EUR 22.0, reflecting the estimate revisions. Tietoevry issued a profit warning and slightly lowered its guidance for 2024 due to a weaker-than-expected market. As a result, we slightly lowered our forecasts for the current and coming years. In 2024-25, we expect revenue to decline slightly, but profitability to remain at last year's level, supported by continued efficiency measures. Despite some near-term operating pressure, the valuation picture remains very attractive from multiple perspectives (2024e adj. P/E 9x, DCF EUR 26, SOTP EUR 24 and a dividend of 9%). 

Preliminary data shows a revenue decline and miss, while earnings exceeded expectations in Q3

Tietoevry will publish its Q3 report on next week's Thursday at 9.00 am EEST. Revenue decreased to around 653 MEUR, depending on the final impact of M&A and exchange rates (estimated -2 MEUR), and landed about 3% below our forecast. Towards the end of the third quarter, demand weakened relative to the company's expectations and the company expects the market to remain weak for the remainder of the year. Tietoevry's adjusted EBIT margin improved by 0.5 percentage points to 13.5% in Q3. Profitability was supported by efficiency measures in all businesses. Profitability was almost 1 percentage point above our and the market's expectations. Thus, the Q3 result was 88 MEUR and exceeded our and market forecasts (84-86 MEUR). However, the strong Q3 result means that Q4 is likely to be weaker than previously expected. It is therefore very possible that new efficiency measures will be announced in Q3.

Focus on Q3 on divesting Tech Service

The focus of the Q3 report is on the outcome of the Tech Service strategic review, the divestment of which would be a relief. Tech Service is now valued at 560 MEUR (prev.  640 MEUR) in our sum of the parts, due to forecast changes and a lower acceptable valuation multiple (now 6.5x EV/EBITA, prev. 7x). We believe it is unlikely that the sale will be resolved before the Q3 results, as nothing has been announced and the company posts its earnings in less than a week. We see the possibility of Tech Service remaining part of Tietoevry as negative news.

The company issued a slight revenue warning and revised its profitability guidance

Due to the continued weak market situation, Tietoevry updated its revenue growth guidance the day before yesterday and now expects organic growth to be around -2% in 2024 (prev. 0-3%). In addition, the company now expects its full-year adjusted EBIT margin to be in the range of 12.3% to 12.7% (prev. 12.0% to 13.0%). As a result, we have lowered our earnings forecasts by ~5% for the current year and by ~7% for the coming years. We expect organic revenue to continue to decline next year (1%) and then return to growth (~3%) in 2025-26. In addition, we expect the company's adjusted EBITA margin to be close to 13% in the coming years, supported by ongoing efficiency measures.

Valuation picture is very moderate and a strong dividend provides a good base return

The earnings warning was mild and partly expected by the market, as the stock rallied +2.3% on the news. With our estimates, Tietoevry’s adjusted P/E and EV/EBIT ratios for 2024 are 9x and almost 60% below peers. The corresponding reported ratios are 12-14x, but almost half of the adjustments are PPA depreciation, which do not affect cash flow and we also adjust these for peers. In our view, the absolute valuation of the share is attractive and the relative valuation is very attractive. The expected return on the share also rises to an attractive level of over 10% on the back of 3% earnings growth and a 9% dividend yield alone. Moreover, the sum-of-the-parts calculation (EUR 24) clearly indicates a higher value than today and is a relevant way to look at the valuation, even if the Banking business remains part of the whole, at least for now. The DCF calculation (EUR 26) also indicates a clear upside.