Tietoevry: Disappointing transaction price, but conditions for growth becoming clearer

Translation: Original published in Finnish on 3/24/2025 at 7:28 pm EET.

We lower our target price for Tietoevry to EUR 21.0 (was 22.0) due to the lower-than-expected purchase price for the Tech Services business. We also lower our recommendation on the stock to Accumulate (was Buy). However, the sale clarifies the company's structure, and all businesses are now positioned in growing market areas, creating a better basis for earnings growth. In the short term, though, the tight market environment will still slow the return to earnings growth. Nevertheless, the share's valuation picture remains attractive (2025e (adj.) P/E and EV/EBIT 12x and 
11x, respectively).

Purchase price below our expectations

Tietoevry announced on Sunday that it has entered into an agreement to divest its Tietoevry Tech Services business to funds advised by Agilitas Private Equity LLP ("Agilitas"). The purchase price (EV) is 400 MEUR, including 100 MEUR of IFRS-16 lease liabilities, and is below our projected enterprise value of 507 MEUR. Of the purchase price, 70 MEUR is an additional purchase price subject to the fulfillment of certain performance milestones in 2026 and 2027, payable in the form of vendor loans.

The valuation of the transaction is 6.7x EV/EBITA on the actual 2024 figures and only 4.5x on the adjusted actual figures. The corresponding multiples excluding the additional purchase price are just under 5.5x and just under 4x. It should also be noted that IFRS 16 liabilities play a very significant role in the transaction price. This means that the valuation of the transaction is below our expectations. We believe it would have been easier for an industrial buyer to realize synergies from the deal, but apparently this was the best candidate for the deal. The company already wrote down the goodwill of Tech Services by 200 MEUR in connection with the Q4 report and expected a further write-down in connection with the transaction. Our estimate for the additional write-down is 80 MEUR.

Clearer structure and clearer earnings growth trajectory

The positive aspect is that the transaction will clarify Tietoevry's structure. The remaining businesses are positioned in growing areas of the market, and the profile of the company is thus changing more clearly towards an earnings growth company. For years, the now sold Tech Services business has been a brake on the group's development. Tietoevry is now a more purely international company offering software, development and consulting services.

All businesses now positioned in growth areas

As a result of the divestment, we have reduced our revenue forecasts by around 30% and our earnings forecasts by around 20% on an annual basis. We have also lowered our dividend projections for the next few years by just under 20%. We expect Tietoevry's revenue to fall by 26% to 2,070 MEUR driven by the business divestment. In organic terms, however, we expect revenue to grow by 0.6% as the weakest performing business is sold. In addition, we expect the adjusted EBITA % to increase to 13.3% in 2025, driven by the divestment of the less profitable business. Tietoevry will issue an updated guidance for the continuing operations in connection with its Q1 report. Furthermore, we understand that the company will hold a capital markets day at the end of the year, it will provide information on the new remaining entity and its financial targets.

Sales transform Tietoevry's profile into a more credible earnings growth company

On our estimates, the adjusted P/E multiples for 2025-2026 are 12-11x and the EV/EBIT multiples are 11-10x. The multiples are ~30% below international peers. One-time costs will decline significantly in the future, making earnings multiples more comparable to peers. In our view, the absolute valuation of the share is attractive and the relative valuation is even very attractive. Given our lowered estimates for the next few years, the dividend yield of around 7% in itself provides healthy support for our earnings expectations.