Sitowise Q3'24: Change expected in 2025

Translation: Original published in Finnish on 11/8/2024 at 7:30 am EET.

We reiterate our target price of EUR 2.50 and Reduce recommendation for Sitowise following the company's Q3 results. Sitowise's Q3 result was weaker than our expectations due to challenges in Sweden and the weak housing market in Finland. Measures have been taken to improve profitability, but a significant turnaround will also require traction from the market. The market outlook remains challenging, and a recovery is now more likely in the second half of next year, which in our view also limits the share's upside in the short term. Given the risks to the business and the uncertain turnaround, we do not see the stock's risk/reward ratio as attractive now.

Q3 result clearly weaker than expected

Sitowise's revenue decreased by 8% to 41.8 MEUR in Q3 (Q3'23: 45.6 MEUR), almost in line with our expectations. Organic revenue was down by 10.5% in the quarter. Sitowise's adjusted EBITA declined to 2.4 MEUR in Q3 (Q3’23: 3.5 MEUR) and the margin decreased to 5.8% (Q3’23: 7.6%). The weak profitability and the earnings miss of almost 50% were driven by the challenges in Sweden and the weak market situation in both the Finnish and Swedish housing markets. The order book was down 8% year-on-year at the end of the quarter at around 154 MEUR, reflecting the still weaker outlook, especially for the housing market in Finland and Sweden.

Forecasts for the next few years down by around 5%

Due to the prolonged market softness, we lowered our operating profit forecasts for the coming years by around 5%. In 2024, Sitowise expects a decrease in revenue (2023: 211 MEUR) and that its adjusted EBITA margin will be below the level of 2023 (2023: 8.1%). In 2024, we now expect revenue to decrease by 8% to 194 MEUR and adjusted EBITA to decrease to 11.8 MEUR (2023: 17.0 MEUR), corresponding to a margin of 6.1%. In Q4, the result will be supported by staff reductions in Sweden and savings measures, but due to weak demand, the utilization rate is at a low level, reducing the potential for earnings improvement. As the market eventually turns and utilization rates improve, we expect earnings levels to rise towards a better level in 2025-26 thanks to strong operational leverage (adj. EBITA-% 25-26e avg.: 8.2%). We estimate that current profitability is below Sitowise's potential (EBITA-% >10%), but reaching this level is still a long way off and will require successfully tackling the challenges in Sweden and much stronger market traction. In our view, the risks to the business from growth challenges and the integration of acquisitions have partially materialized, adding now to the uncertainty surrounding the company's long-term potential.

Valuation does not encourage operational risk-taking

The multiples for Sitowise's stock this year are high due to the weak result. The turnaround in profitability brought about by a market recovery and rising utilization rates will reduce the valuation in the coming years (25-26e avg.: EV/EBITDA: 7x, P/E: 12x). However, we do not believe that valuation is at an attractive level, as uncertainty about the pace of the market recovery keeps forecast risks elevated. Based on the 2025-26 estimates and the valuation range we accept (EV/EBITDA: 7x, P/E: 12x), the stock would have no upside. The dividend yield does not support the expected return in the short term, as we do not expect dividends for 2024. The valuation of the peers (2025e) is, in our opinion, at a demanding level (median P/E: 17), which, in addition to the better performance and lower risks of the peers, reduces the value reflected in the relative valuation. The DCF calculation is higher than the share price (EUR 3.2), indicating long-term potential in the stock.