Solwers Q1'24: Clean bill of health from the first checkpoint

The operative lines of Solwers’ Q1 business review published on Friday significantly exceeded our forecast. However, we estimate that the main driver was a much more moderate seasonality than we predicted in the first quarter. As a whole, the demand situation seems to have developed largely in line with our expectations, and reflecting this, we made no forecast changes. Therefore, we reiterate our EUR 5.0 target price and Buy recommendation. Our recently published extensive report on Solwers is freely available here.

Revenue exceeded our forecast, profitability at the expected level

Solwers’ Q1 revenue increased by nearly 19% from the comparison period to 19.2 MEUR, which exceeded our forecast of 16 MEUR by a clear margin. Our H1 growth forecast was 15% and our full-year forecast was 17%, with which the growth rate of Q1 was better aligned. This was the company’s first quarterly review, and as we wrote in our preview, this made it difficult to assess the seasonality of the business as no comparison figures had been published. The growth rate also corresponded to the inorganic growth we estimated for the whole H1, so we estimated that the organic growth of Q1 was roughly around zero. Reflecting the revenue level exceeding our forecast, Q1’s EBITA reached 1.5 MEUR, while the quarter’s profitability (Q1’24 EBITA % 8.0%) met our expectations.

Outlook unchanged, we made no forecast changes

Solwers has not issued numerical guidance as usual, but according to them, the outlook for the current year has remained unchanged and it has a good order backlog in public sector and infrastructure projects, as well as long assignments in hospital and school planning projects. The company also expects further improvement in the business environment toward the end of the year due to a general market pick-up. In addition, the company commented at the end of the quarter that it had noticed a clear pick-up in the number of new projects and, consequently, billing rates. The company also expects to continue acquisitions in the current year, which we consider positive from the viewpoint of improved capital use efficiency, assuming that the acquisition targets are of high quality and the price paid is reasonable. Overall, the company’s demand situation seems to have developed more or less in line with our expectations, and we did not see any reason to change our forecasts based on the Q1 report. We, thus, expect the most subdued period in the market situation to be largely over and the demand picture to pick up gradually, supported by a gradually improving economic environment and investment activity. The forecasted 17%  revenue growth for the current year is based on inorganic growth, and reflecting this, we also expect EBITA in 2024 to increase to 7.9 MEUR (2023: 7.0 MEUR), in line with the relatively stable profitability trend. 

We believe there is upside in the valuation

Based on our estimates, P/E ratios for 2024-2025 are 14-13x and the corresponding EV/EBIT ratios considering the balance sheet structure are 12x and 11x, respectively. In absolute terms, we find earnings-based valuation multiples to be relatively moderate, considering the assets in the balance sheet available for inorganic growth. In relative terms, the share is valued at a hefty discount compared to the peer group, which we feel is reasonably valued. We, therefore, believe that there is clear upside in the share’s valuation, which our cash flow model also supports (EUR 5.0 per share).