Luotea extensive report: Turnaround company with a strong cash flow

Translation: Original published in Finnish on 4/6/2026 at 12:00 pm EEST.

We expect Luotea to continue its clear trend of earnings improvement in 2026-27 as its losses in Sweden turn into profits. In our estimation, the company generates strong cash flow, which, in our opinion, alone provides a sufficient expected return for investors. We reiterate our Accumulate recommendation and a target price of EUR 2.6.

Labor-intensive business in a fragmented industry

Slightly less than half of Luotea's revenue comes from cleaning services, with the other half divided fairly evenly between property maintenance and technical services. The company estimates that it is one of the three largest players in Finland. However, the company's position in technical services is significantly weaker, ranked #7-9 according to its previous estimates.  The market is highly fragmented, though, and the company's market share is less than 5%. Approximately one-third of Luotea's revenue comes from Sweden, and the remainder comes from Finland. According to the company, as much as 97% of its revenue is re-occurring, and its customer base is quite diverse. However, the long duration of the agreements also poses a problem to some extent, as the company is currently suffering in Sweden from old agreements under which it has been unable to pass on cost inflation to prices, resulting in losses.

Cash flow profile is strong

Luotea's service business ties up very little capital and therefore has a strong cash flow profile. Return on capital also rises to several tens of percent even at a reasonable level of profitability. We estimate that Luotea’s cash flow will exceed its earnings, particularly in the next few years. This is due to investments being lower than depreciation levels, negative working capital, and purchase price amortization, which will continue in Sweden this year and partially next year. However, the last item is not reflected in the adj. EBITA figure used by the company, nor in the other adjusted figures in our report. In this report, we revised our forecasts, resulting in slightly lower projections for adj. EBITA but higher projections for earnings per share.

Targets seem challenging

Luotea's medium-term financial targets include achieving an average annual organic revenue growth rate of 4-5% and an adj. EBITA margin of over 5%. Luotea's businesses have historically struggled to generate profitable growth. Therefore, we consider the combination of a 4-5% growth target and a 5% margin target challenging. The company already reaches its margin target in Finland, but we deem achieving 5% unrealistic in Sweden, at least in the next few years. However, we expect the Swedish operations to become clearly profitable in the coming years, after experiencing losses in recent years, thus supporting the group's overall earnings growth. We believe it is difficult to create a sustainable competitive advantage in Luotea’s industry. For this reason, we hope the company will emphasize the profitability target more than growth because overly aggressive pursuit of growth is likely to lead to a decline in profitability.

Valuation is fairly favorable

Luotea's figures from last year do not fully reflect the current structure due to the spin-off from L&T. Therefore, we focus on valuation multiples for the forecast years, which, of course, assume a clear improvement in earnings from last year. We forecast a P/E ratio of 9–10x for 2026–28, which we believe is an acceptable level for the company. EV-based multiples remain at the 6–8x level, suggesting some upside relative to what we consider acceptable. We estimate the company's free cash flow yield to be around 10% in 2026, thus already slightly exceeding our required return on its own. With a strong balance sheet, the dividend yield could also approach the cash flow yield if the company does not acquire other businesses. Thus, cash flow and dividend yield support the investor's expected return even though we do not anticipate earnings growth beyond next year. Also the value of our DCF (EUR 3.1) is well above the current price.