Tecnotree: A notch more moderate view is warranted

Translation: Original published in Finnish on 1/28/2025 at 7:10 am EET.

Tecnotree's reported deal in the US showed that the company's products are competitive in developed markets. In an optimistic scenario, the US could offer significant growth potential and help improve the company's cash flow profile, but we believe it is too early to count on conquering the US. In our view, the risks related to corporate governance have not been fully eliminated. Combined with the cash flow uncertainty, the risk/reward of the stock is still not attractive in our view. However, the announced deal was the first clear positive news for the company in a while, which, combined with the lower valuation, argues for a more middle-of-the-road view. We raise our recommendation to Reduce (was Sell) and reiterate our target price of EUR 3.0. 

Growth in the US would be welcome

Last week, Tecnotree announced a multi-million-dollar deal with a US-based Tier 1 operator (more detailed comment here). We believe the announcement was encouraging for the company as it demonstrates that the company's products are competitive enough to compete in the highly sought after US market. Growth in developed markets is also generally welcome from our perspective, as it has the potential to improve the company's cash flow profile over the long term through faster cash collections and reduced foreign exchange risk. However, even in a good scenario, it takes time to change the business focus and thus the cash flow profile. On the flip side, we estimate that the more competitive environment in the US than in developed markets could put pressure on the company's margins. Maintaining technological competitiveness here will also require, we believe, continued and generous product development investments.

Weak investor confidence ultimately stems from weak cash flow

Tecnotree's investment story took a hit in the fall of 2024, when the company's acquisition raised concerns about its corporate governance and investor communications. In this regard, the company will have to build trust over time and the situation will not be repaired immediately. Also, at the heart of weak investor confidence has been poor cash flow, which has not reflected the company's performance. The company's ambition to grow in developed markets is one of the remedies, and the announced transaction is a promising step in this direction. However, one new agreement in the US does not change the overall picture as far as we can see, but more success is needed in the developed markets. Hence, cash flow development will continue to drive the investment story.

We believe that a more moderate view is justified

In our view, determining the fair value of Tecnotree is very challenging. We do not believe that cheap-looking earnings-based multiples can be relied upon, and visibility on the company's sustainable cash flow generation capacity is weak. Around the lower end of next year's cash flow guidance, the cash flow yield would be in the single digits, which we find unattractive given Tecnotree's risk level. The valuation should also take into account the dilution caused by the company's convertible bonds and the staff incentive plan in the coming years (combined effect of almost 50% at the current share price). We believe that the company's business risk level is high and that further evidence of the company's communication and corporate governance improvements is needed. In general, we see risks related to the quality of receivables and intangible assets. Looking at the big picture, we still think the risk/reward for investors is weak, although we think the recent announcement of a promising deal justifies a view one notch more moderate. We emphasize that Tecnotree’s target price is illusory and suggest that investors pay particular attention to our recommendation.