Translation: Original published in Finnish on 06/18/2026 at 08:40 am EEST

Solwers withdrew its guidance yesterday, and based on that, a critical improvement in earnings may not be initiated this year either. We lowered our estimates and, as a result, the target price to EUR 1.8 (was EUR 2.1) and reiterate our Reduce recommendation.

Challenges in Swedish industrial sector weigh on earnings

Solwers announced that it was withdrawing its guidance for this year and warned that the company would not meet the covenant terms of its financing agreement at the end of June According to the company, the first half of 2026 has developed weaker than expected, particularly due to the poor performance of companies serving the industrial sector in Sweden. We have previously noted the intense price competition in the Swedish industrial sector, but the continued weak performance is a negative surprise, and the corrective measures previously initiated by the company do not appear to have taken proper effect.

Solwers previously expected its full-year EBITA margin to improve year on year, but this is now uncertain, and the company has withdrawn its outlook for the time being. Before the warning, we expected this year's adjusted EBITA to rise to 3.1 MEUR (2025:  2.0 MEUR), but due to a weak start to the year, the earnings turnaround's slope appears to be gentler than our previous estimate, and our forecast decreased to 2.3 MEUR. The company said it would increase measures to improve profitability, but we believe the effects typically appear with a delay, and no quick relief is expected. We have therefore also decreased the slope of our estimated earnings growth for the coming years. At the same time, we also slightly raised our financial cost estimates.

Covenant breach materializes the balance sheet risk

In our view, the most concerning, though not surprising, information from the profit warning relates to the company's financial position. Solwers estimates that it will not meet its current net debt/EBITDA covenant (below 3.5x) on the June 30, 2026testing date and has initiated negotiations with its main bank to resolve the situation. With our current calculations, the level will remain around 5x at the end of H1.

We have repeatedly emphasized that the company's elevated leverage requires earnings growth to decrease. Now that the operational result is faltering, the balance sheet risk is materializing. We suspect the most probable short-term solution involves negotiating a new exemption, which would further increase the company's financing costs and reduce the cash flow available to shareholders. If an earnings turnaround is not achieved in the coming quarters, we cannot rule out more drastic balance sheet restructuring measures in the longer term, such as a share issue, which would dilute ownership unfavorably.

Increased financial risk weighs on acceptable multiples

Solwers' risk profile depends on its normal profitability level, as the company's debt servicing capacity and thus the debt-related risk level depend on the earnings level. To put it a bit bluntly, if the profitability level were to remain close to the levels seen during 2024-2026e, the share would be expensive, the M&A strategy would have failed, and the debt burden would be a challenge.

Similarly, if profitability recovers for a longer period to the level predicted by our forecasts, the stock valuation from 2028 onwards will be quite favorable, and the level of debt will be under control. At this point, new acquisitions can also be considered again. However, the valuation with current 2026 and 2027 estimates (EV/EBIT 34x and 14x) does not look attractive, and financing risks also weaken the risk/reward in the short term. The DCF calculation is also now at EUR 1.8, which is below the share price In our opinion, it is better for investors to continue waiting for clearer signs of an earnings turnaround before getting on board with the share. In the H1 report in August, management should be able to offer a credible and more transparent path to rectifying the problems in Sweden.