Wärtsilä Q3'25: Good momentum continued, but we doubt the sustainability of demand

Translation: Original published in Finnish on 10/29/2025 at 8:11 am EET.

Orders in Wärtsilä's main segments developed well in Q3, and cash flow development appears stronger than previously expected. There is strong visibility for earnings growth in the coming years. However, we find that the current valuation already prices in continued order growth well into the end of the decade. We see a risk of a correction in investment-driven demand after its very strong growth in 2024-25. We reiterate our Reduce recommendation and raise our target price to EUR 26 due to estimate revisions (previously EUR 22).

Good progress continued in Q3

The Q3 report was generally in line with expectations, with orders growing organically by 6% and adjusted EBIT matching the consensus exactly. However, reported order growth was only 0% due to the divestment of ANCS and exchange rate fluctuations, and orders for Energy Storage, a small contributor to earnings, fell short of expectations. Among the major segments, orders for Marine grew by 8%, which was in line with expectations, while the strong order growth for Energy (29%) exceeded the consensus by 7 pp. We also believe that Energy's underlying profitability development was better than expected, although this has not yet been reflected in the current quarter's result due to low new equipment sales deliveries (weighted towards Q4). Reported EBIT was mainly supported by a 34 MEUR sales gain related to the divestment of the ANCS unit, which was in line with expectations. Wärtsilä's cash flow from operating activities has strengthened considerably this year (Q1-Q3: 946 MEUR, +23% y/y), and we interpreted the company's comments as indicating that the trend in working capital is not expected to reverse, at least in the short term.

Estimates of earnings and cash flow increased

As expected, Wärtsilä maintained guidance similar to that of the previous quarter. The company expects the demand environment to improve in Marine and Energy Storage and to remain at the same level in Energy over the next 12 months compared to the previous 12 months. We made minor upward adjustments to our estimates, mainly supported by Energy's stronger performance, resulting in a 2-4% increase in adj. EBIT at the group level for 2025-27. Additionally, we significantly raised our cash flow projections, supported by more positive working capital comments.

The company has a good outlook for revenue and earnings development in Marine and Energy in the coming years, thanks to strong order book growth (combined adj. EBIT growth 2026e: 14%). Our forecasts predict only 3% order growth for Marine and -3% for Energy over the next 12 months, meaning growth will gradually slow toward the long-term level (2027-28e EBIT growth: 9% and 6%).

Continuity of growth is a concern

In our view, visibility into Wärtsilä's 2026 EBIT is high, against which an EV/EBIT of 15.5x is not particularly expensive, though not cheap either. The 2027 multiple of 13.7x would already be somewhat attractive if the visibility for the coming years had a similar upward trajectory. However, we believe it is possible that earnings growth could slow significantly from 2028 onwards. A growing portion of Marine and Energy's combined earnings comes from new equipment sales (2023->27 estimate: 13->30%), which are clearly becoming more profitable, supported by strong demand. Thus, the impact of a potential weakening in demand on profitability could be accentuated in the future, even though market activity has remained good so far. Although markets supported by megatrends offer long-term growth, we believe the possibility of a correction has increased after the exceptionally strong, investment-driven order growth of 2024–25, should investments in data centers dry up, for example. We therefore do not consider the risk/reward ratio of the share to be sufficient, given the relatively high valuation multiples. Our target price increased primarily based on a stronger cash flow outlook but was also supported by higher earnings estimates and long-term profitability assumptions in DCF.