This report is a summary translation of the report “Tulosvaroitus kielii haasteista Ruotsissa” published on 8/1/2024 at 6:20 am EEST.

On Wednesday, Sitowise lowered its revenue and earnings guidance for 2024, mainly due to weaker-than-expected developments in Sweden. We expected a profit warning from Sitowise after the last update due to continued market weakness, but weaker-than-expected Q2 numbers have lowered our forecasts for the current year. In our view, the warning raises the risk of deeper problems in the Swedish business, and we expect a negative price reaction. We reiterate our Reduce recommendation and lower our target price to EUR 2.70 (was EUR 2.90).

Revenue and profitability down this year

Sitowise now expects revenue to decline in 2024 (2023: 210.9 MEUR) due to a decline in the Buildings business and a weaker growth outlook for the Swedish business in the second half of the year (previously: revenue to decline slightly in 2024). For 2024, Sitowise expects the adjusted EBITA margin (%) to be lower than in 2023, whereas previously it was estimated to be at the same level or better than in 2023 (2023: 8.1%). Before the warning, we had forecast a 4.8% decline in revenue to 200.7 MEUR and an adjusted EBITA margin of 7.5%, so the profit warning was expected from our side.

Sweden particularly weak

As background and justification for the guidance, Sitowise points out that the development was particularly burdened by the significantly weaker-than-expected performance of the Swedish business. According to the stock exchange release, there have been project overruns in Sweden, which obviously does not bode well for operational performance. In addition, the workload in Sweden was insufficient in relation to the staff, which we estimate will have a negative impact on Sitowise's billing rate. No orders have been received and projects have moved on. Necessary compensatory measures take more time, because temporary layoffs are not possible in Sweden as they are in Finland. The Swedish business is expected to remain challenging in H2 due to an insufficient order book. The turnaround in the Buildings business in Finland is still a work in progress. However, the Infra and Digital Solutions businesses developed strongly in Q2 and the outlook for these businesses is good.

Q2 preliminary data weaker than expected

The company also provided preliminary data for Q2. According to preliminary data, the decline in revenue accelerated compared to Q1 and amounted to 10%. Revenue was 50.9 MEUR (Q2'23: 56.5 MEUR) and adjusted EBITA decreased to 2.6 MEUR (Q2'23: 4.5 MEUR). The margin fell to a very low level of 5% (Q2'23: 8.0%). In particular, the margin was well below our previous forecast (Q2'23e: 7.7%) and raises questions about broader profitability issues. After all, in Q2, profitability was supported by an increase in the number of working days. We have slashed our estimates for Q2 but have not materially changed our forecasts for the next few years until we have clarity on the magnitude of the challenges from the company's Q2 results on August 13, 2024.

More clarity is needed on the severity of the challenges

Sitowise is highly valued in the short term and there is no reason to rely on the uncertain potential of the profitability turnaround (DCF: EUR 3.9) until the Q2 report gives us more clarity on the severity of the challenges. Although the earnings warning was in line with our expectations, we expect the market to react negatively to the change in guidance. We have lowered our target price in light of the revised forecasts and increased risks.