Wärtsilä Q1'25: Outlook for earnings growth remains good

Translation: Original published in Finnish on 4/28/2025 at 8:17 am EEST.

The first months of the year were good in terms of earnings and the distribution of the order intake was also slightly better than expected. The company maintained a positive market outlook, which we believe somewhat alleviates concerns about uncertainties affecting market growth that have increased in recent months. The company has a strong position and high return on capital in a structurally growing end market, which we believe makes the current discounted valuation level attractive. We reiterate our Accumulate recommendation and EUR 18.5 target price.

Results show good start to year in line with expectations

Q1 was good and largely in line with expectations. Revenue was 8% below forecasts, mainly due to the timing of deliveries in Energy Storage, which is volatile on a quarterly basis and has low margins. The group's adjusted EBIT (171 MEUR) increased by 29% year-on-year and met the estimates. Cash flow from operating activities was at a good level of 190 MEUR, although lower compared to the strong level of the comparison period
(258 MEUR). The company reiterated its message that net working capital remains at an exceptionally good level and that more capital will be tied up in the near future, which may weigh on cash flow relative to the earnings.

Order intake distribution slightly better than expected

Q1 order intake of 1902 MEUR (-1% y/y) was in line with consensus and 3% above our forecast. Service business orders grew at a steady pace of 5%, while new equipment orders were down 7% compared to the strong first quarter of last year. Order intake for Energy's Power Plant business grew by 16%, continuing the strong trend of the previous quarters and beating the consensus forecast by 13%. Portfolio Business also showed strong growth in order intake of 32%, exceeding consensus by 36%. Marine orders grew by 11%, which was almost in line with expectations. Energy Storage orders declined and fell short of expectations. Overall, we view the order mix as favorable relative to expectations, as we expect order growth, particularly in Energy's Power Plant business, to be more material to long-term earnings development than in Energy Storage. The order book stood at 8,533 MEUR at the end of Q1 (+17% y/y).

Outlook for next 12 months remains positive

Wärtsilä expects the demand environment in Marine and Energy over the next 12 months to be better than the comparison period (as also estimated at the end of the previous quarter). The outlook for new ship orders has weakened due to the uncertainty in world trade caused by the trade war, but demand for Wärtsilä's important ship segments, such as cruise ships and ferries, remains good. Power Plant orders continue to enjoy good momentum. Energy Storage is suffering from fears of tariffs in the US, which nevertheless accounts for a limited share of the total segment. Wärtsilä has protected its position in its customer and supply contracts so that any changes in tariffs do not result in unexpected additional costs for the company and the risks are borne by the customers. In addition, in line with its strategy, the company strives to grow the service revenue by deepening cooperation with customers, which will support the profitability outlook. We left our estimates largely unchanged.

Competitiveness and market growth outlook are compelling

The EV/EBIT of 9.7x in our 2025 forecasts is, in our view, a very moderate level for a company with a strong return on investment (ROI 2024: 24%) and long-term growth supported by, among other things, emission reductions. The valuation gap to the peer group has already widened to 42% (median EV/EBIT 2025e of peers: 16,6x). On the other hand, it is important to acknowledge that the indirect impacts of the trade war on Wärtsilä are still difficult to assess, which means that the earnings outlook for 2025-26 in particular is subject to a high degree of uncertainty. The complex structure of the group may also partly weigh on the valuation accepted by the market in relation to our DCF calculation (DCF: EUR 19.3 per share).