Translation: Original published in Finnish on 10/25/2024 at 7:35 am EEST.

We reiterate our Buy recommendation and EUR 22.0 target price for Tietoevry. The big picture of Tietoevry's Q3 performance was already known with the figures the company released last week in its earnings warning. The focus was therefore on the strategic review of Tech Services, and the report revealed that the sale process is nearing completion, which is a cautiously positive signal. We have left our forecasts largely unchanged and expect revenue to decline slightly in 2024-25, but profitability to remain at last year's level, supported by ongoing efficiency measures. Despite some near-term operating pressure, the valuation picture remains very attractive from multiple perspectives (2024e adj. P/E 9x, DCF EUR 25, SOTP EUR 24 and a dividend of 8%). 

Q3 figures were even better than expected, but weakened towards the end of the quarter

Tietoevry's revenue decreased by 1% to 655 MEUR, slightly below our forecasts before the guidance downgrade, but in line with our updated forecasts. Organically, revenue decreased by 1%. The company said the decline in demand has spread to more geographic markets and more activities. This means that the weakness is much more widespread than in the past. Tietoevry’s adjusted EBITA was 88 MEUR or 13.5% of revenue (Q2’23: 73 MEUR). The result was therefore slightly above our and pre-warning consensus forecasts, but in line with our subsequently updated forecasts. The improvement in profitability was driven by efficiency improvements in all businesses.

Tech Services sale process advanced to the home stretch with a buyer

Tietoevry said that the strategic review of the Tech Services business is progressing and that the company is in exclusive negotiations with a non-industrial player. As a result, we believe the sale process is in its final stages. Depending on when the process was initiated, we estimate that this could take a few months. We believe it would have been easier for an industrial buyer to realize synergies from the deal. On the other hand, a non-industrial buyer may have other means to extract value from the target, such as solutions to optimize the financing structure, which will naturally affect the price the buyer can pay for Tech Services. This means that there are still uncertainties, in particular about the price, but also about the closing of the transaction. The divestment could also act as a catalyst to unwind the undervaluation. As we see it, Tech Services remaining part of Tietoevry would be negative news.

The company issued a slight revenue warning and revised its profitability guidance last week

Due to the continued weak market situation, Tietoevry updated its revenue growth guidance last week and now expects organic growth to be around -2% in 2024 (prev. 0-3%). In addition, the company now expects its full-year adjusted EBIT margin to be in the range of 12.3% to 12.7% (prev. 12.0% to 13.0%). We have left our forecasts largely unchanged and expect organic revenue to decline next year (1%) and then return to growth (~3%) in 2026. In addition, we expect the company's adjusted EBITA margin to be close to 13% in the coming years, supported by ongoing efficiency measures.

Valuation picture is very attractive and a strong dividend provides a good base return

On our estimates, the adjusted P/E and EV/EBIT multiples for 2024-25 are ~9x. The multiples are and ~40% below peers. The corresponding reported ratios are 12-15x, but almost half of the adjustments are PPA depreciation, which do not affect cash flow and we also adjust these for peers. In our view, the absolute valuation of the share is attractive and the relative valuation is very attractive. The expected return on the share also rises to an attractive level of over 10% on the back of 3% earnings growth and an 8% dividend yield alone. Moreover, the sum-of-the-parts calculation (EUR 24) clearly indicates a higher value than today and is a relevant way to look at the valuation, even if the Banking business remains part of the whole, at least for now. The DCF calculation (EUR 26) also indicates a clear upside.