Solwers H1'25: Awaiting concrete signs of earnings turnaround

Translation: Original published in Finnish on 8/26/2025 at 10:00 pm EEST.

We revise our target price for Solwers to EUR 2.5 (was EUR 2.65) reflecting negative forecast changes. The H1 report was underwhelming, and profitability remained weak. A market recovery is still some time away, and, although the building blocks for recovery are clearly in place, uncertainty about improving earnings has increased. Breaches of covenants also raise the short-term risk profile, and overall, the risk/reward ratio leans negative in our view. We are lowering our recommendation to Reduce (previously Accumulate) and will wait for concrete signs of a recovery in earnings levels.

Underwhelming H1 report

Although revenue grew by 6%, driven by acquisitions, organic growth was slightly negative due to subdued demand and intense price competition. Profitability continued to develop poorly, and EBIT was close to zero, as in Q1. In addition to weak demand and intense price competition, margins were weighed down by non-recurring items totaling approximately 1 MEUR (project challenges and transition to the main list). Previous savings were buried under margin pressures. The company stated that it had continued its moderate adjustment measures and aims at savings of 1 MEUR during 2025. Due to weak earnings development, the company did not meet its covenant terms at the end of H1, but its principal lender, Nordea, has granted a waiver in this regard. While we are not overly concerned about the covenant breach, it highlights the company's weak earnings level and the need for improvement.

The company expects to benefit from the general market upturn, which is projected to strengthen towards the end of the year. Additionally, the company already reported signs of a tentative market upturn, though the recovery has been delayed again compared to previous expectations. Solwers also reported that its order book was at a good level and that billing rates had risen moderately. Given the company's value chain position, it should benefit relatively quickly from the market recovery. 

Normal profitability level a key question mark 

We have revised our estimates downward following the lackluster H1 report. We still predict that organic revenue will gradually increase in H2’25, driven by the market situation. As utilization rates improve, savings are realized, and one-time costs are eliminated, the company's results should also recover significantly. Currently, the key question is what the company's normal level of profitability will be once the market improves. In our opinion, it will evidently be better than the 2024 level, which was clearly burdened by a weak cycle and non-recurring expenses, but a return to the 2019-2023 averages seems unlikely at the moment. Although our profitability forecasts are clearly below the 2019-23 levels, we anticipate a substantial improvement in profitability in the coming years.

Profit improvement drives the stock price

Solwers' risk profile also depends on its normal level of profitability, as the company's ability to service its debt and, at the same time, the level of risk associated with the debt depend on its earnings level. In simplified terms, if profitability remained close to the levels seen during the previous 18 months, the stock would be overpriced, the acquisition strategy would be unsuccessful, and the debt burden would be problematic. Similarly, if profitability recovers to the level predicted by our forecasts, the stock valuation will be quite favorable, and the level of debt will be under control. The stock would be extremely cheap (P/E 5-6x) if profitability were to return to even close to the average levels of 2019–2023.

In light of our lowered forecasts and increased financial risks, the risk-reward of the share has weakened and leans toward negative. Although the stock undoubtedly has considerable potential as results recover, there is growing uncertainty about the timing of earnings improvement and normal earnings levels. In addition, increased financial risks raise the risk profile and limit opportunities for corporate acquisitions.