Tecnotree: Trust needs to be rebuilt

This report is a summary translation of the report “Luottamus on rakennettava uudestaan” published on 9/8/2024 at 21:50 pm EEST.

Tecnotree held an investor event on Friday in an attempt to provide background information on the Pericius deal. However, we did not get answers to all the worrying details. The company also issued cash flow guidance for next year and published a dividend policy, according to which free cash flow (and profit distribution) are set to remain slim and below our expectations. Given the weak cash flow and the ongoing uncertainties regarding corporate governance, we recommend that investors remain on the sidelines, at least for the time being, due to the elevated risk profile. We lower our recommendation for Tecnotree to Sell (was Reduce) and set our target price to EUR 3.00 (was EUR 5.50).

Company attempted to clarify background to Pericius deal, but not all details are clear

In Q2'24, Tecnotree completed a transaction related to the assets acquired from Pericius Technologies. However, the company did not disclose this openly and there were many questions about the possible related parties involved in the transaction. The company attempted to provide details of the transaction at the investor event, but we feel that we did not receive comprehensive answers to all of our questions. Possible related party links look bad to us, even though no wrongdoing may have occurred and would be difficult to prove. In addition to the Pericius transaction, Tecnotree has a history of several other incidents of poor investor communication and corporate governance and has been under scrutiny on these issues for some time.

Guidance suggests that cash flow will remain relatively weak next year

For next year's cash flow, Tecnotree provided guidance that the company expects capital expenditure to be 10-12% of revenue (at constant exchange rates) and free cash flow to be above 3 MEUR. Despite lower investments, cash flow would remain lean next year at the lower end of the guidance range. With the company's revised dividend policy (dividends at 10% of free cash flow), the dividend stream to investors is also set to remain weak. Cash flows are still far from the figures in the company's income statement, which we believe paint an overly rosy picture of the company's ability to generate cash. Given the ongoing cash flow challenges, we believe that risks related to the quality of receivables and intangible assets, for example, are elevated. As such, we believe the company has a lot to prove and that a clear and sustainable improvement in cash flow is key to restoring investor confidence.

Valuation of Tecnotree in the current situation is very difficult

In our view, determining the fair value of Tecnotree in the current situation 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 around 48% at the current share price). In our view, the company has always had a high level of risk, but the recent Pericius transaction has further highlighted the company's shortcomings in communication and corporate governance. Recent events have also, we think, brought previously recognized risks to the forefront (e.g. the quality of receivables and intangible assets). As a result, the risk profile of the stock has increased and we have raised our required return even further. Overall, we consider the risk/reward ratio for investors to be clearly unsatisfactory, which is the reason for the downgrade of the recommendation. We emphasize that a target price for Tecnotree is illusory in the current situation and recommend that investors pay particular attention to the recommendation.