Translation: Original published in Finnish on 5/28/2025 at 8:10 am EEST.

The agreement announced by Tecnotree on Monday clearly supports the company's growth outlook for the coming years. Although the agreement supports cash flow potential, we expect cash flows from it to be repatriated only in the distant future. Due to our increased projections, we raise our target price to EUR 3.8 (previously EUR 3.5) and reiterate our Reduce recommendation. 

Agreement with a leading South African telecommunications operator

Yesterday, Tecnotree announced that it has signed an agreement with one of South Africa's leading telecommunications operators for a comprehensive digital BSS transformation project (our preliminary comment can be read here). We estimate that the contract will be recognized based on the milestones achieved. These milestones are not entirely within Tecnotree's control, so the timing of the contract's recognition is still uncertain. If evenly spread, the seven-year contract would generate a revenue of just under 6 MEUR per year, but in reality, the breakdown may be much more uneven. We don't know what currency the contract is in, but we guess it's either US dollars or South African rand. While the dollar would obviously be the more stable alternative, the South African rand has been more stable in recent years compared to the Nigerian naira, for example. In the longer term, however, it has weakened against the euro.

Some estimate hikes

Due to the new agreement, we have increased our growth and operating profit forecasts for the coming years (+2-7%). According to the company, however, the guidance for the current year remains unchanged, so there will not yet be a significant impact on revenue for the current year (the guidance indicates a low-to-medium revenue growth rate in constant currencies). We now expect Tecnotree's revenue to grow by 5.4% to 75.4 MEUR this year. We expect growth to accelerate to 6% next year when we anticipate the contract will start generating clearer revenue. Regarding cash flows, we anticipate that the new contract ties up a significant amount of working capital initially, with cash flows lagging behind. We have therefore increased our medium- and long-term forecasts for working capital commitment. However, we assume that the customer has a reliable payment history given that they are a long-term customer.

We continue to monitor the evolution of the cash flow profile from the sidelines

The difficulty in determining Tecnotree's fair value is that we cannot rely on seemingly cheap earnings-based multiples because visibility into the company's sustainable cash flow generation capacity is weak. Around the lower end of this 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 newly announced agreement supports the company's growth outlook and future cash flow potential, but there is still uncertainty about when and to what extent cash flow will start to accrue. We have made changes to our DCF model for our medium- and long-term cash flow projections. At the same time, we have also lowered our expected return slightly to 15.2% (previously 16.9%), reflecting the recent improvement in cash flow and contracts won. Our DCF model, which still assumes a significant improvement in cash flow over the next few years, suggests a value of EUR 3.8 per share. However, the model does not take into account the dilution from the company's convertible bonds and employee stock option plan over the next few years (combined effect of around 40-50% at the current share price if the remaining convertible bonds are subscribed), which makes the upside unattractive. In our view, continued improvement in cash flow in the coming years is the main driver of the stock and if the cash flow profile were to improve permanently, the stock would have significant potential. However, we believe that the improving cash flow outlook at the current valuation is already priced into the stock, and thus we will continue to monitor the development of the cash flow profile from the sidelines.