Talenom: We see uncertainty as a buying opportunity

This report is a summary translation of the report “Näemme epävarmuuden ostomahdollisuutena” published on 8/20/2024 at 7:35 am EEST.

We raise our recommendation for Talenom to Buy (previously Accumulate) and revise our target price to EUR 5.6 (previously EUR 6.0). Finland's economic recovery does not seem to be on the expected path, which is why we have lowered our growth and earnings forecasts for the coming years by around 5%. However, we expect the company to be able to achieve significant profitability improvements in the coming years, especially in Sweden, as the benefits of implementing its own software become apparent. The valuation has come down to an attractive level (2025e EV/EBIT 15x) in line with the stock, although the risks have increased along with the sluggish development of the business.

The share has fallen to attractive levels, although there are risks

Talenom's share price has continued to fall sharply, bringing the valuation down to attractive levels. Valuation multiples for 2024 (EV/EBIT 20x) are reasonable, although earnings are weak with Sweden and Spain in the red. The EV/EBIT for 2025 is only 15x, with no material international earnings contribution. Sweden and Spain receive slightly higher values than the book value in our sum-of-the-parts calculation, where we estimate it at around EUR 5.6 (previously EUR 6.0-6.2). The change is largely due to lower forecasts and a slight reduction in the acceptable valuation for Finland. In our view, the key driver in the coming years will be the progress in efficiency and profitability in Sweden, as the benefits of the proprietary software are reflected in the figures. If Talenom succeeds in Sweden, the current valuation will be very low. On the other hand, the company has major risks that must be avoided: the risk of a profit warning, financial risks posed by high debt leverage and uncertainty about international competitiveness. In a negative scenario, speed is still sought further down, but we nevertheless consider the current risk/reward ratio to be very attractive. 

Sweden to set the direction for international business in the coming years

In recent years, Talenom has grown aggressively through acquisitions in Sweden and Spain. We forecast revenue in Sweden to be some 26 MEUR and in Spain (incl. Italy) around 16 MEUR in 2024, accounting for almost one third of the group's revenue. However, at the operating profit level, the contribution is negative this year and close to zero in the 2025 projections. The introduction of proprietary systems in Sweden is underway, and the benefits will be seen in the coming years. In three years' time, Sweden's profitability should theoretically be close to Finland's, with an EBITDA margin difference of around 35% in 2024. Our forecasts are much more moderate, but the improvements from current levels will be significant. In Spain, the strategy is different and the benefits should be more straightforward, but in both cases the company must succeed in organic growth. Although there is considerable uncertainty surrounding the international business, the company's earnings growth outlook for the next few years is excellent from the weak starting level. At the same time, Talenom's profitability and growth potential would recover to excellent levels.

Finland to achieve record results despite recession

Talenom has a strong position in the fragmented Finnish accounting industry, where the company has a clear technological competitive edge thanks to the automated accounting production line. This is evidenced by Finland’s manifold profitability compared to the sector (Finland 2024e almost 40%). Currently, Finland's organic growth is slow in the recession, but as market headwinds ease, we expect Finland's growth to return to 5-10% in the coming years. Although geographic expansion is difficult in Finland, there is significant growth potential in the small company sector and the continued development of automation still offers opportunities for the success story to continue. We now assume EV/EBIT multiples of 16x (2024e) and 13x (2025e) for Finland in the sum-of-the-parts calculation.