Solwers H1'24: Slowest period of demand likely over

This report is a summary translation of the report “Kysynnän vaisuin jakso lienee ohitettu” published on 8/30/2024 at 10:02 pm EEST.

The H1 results published by Solwers on Friday were slightly below our forecasts, but this was mainly due to non-recurring items. We have made only minor downward revisions to our organic forecasts, while also taking into account the recent acquisitions. Against this background, the overall changes made to our forecasts were not large. In our view, the stock has clear upside, provided the company manages to improve its balance sheet efficiency and execute successful acquisitions in line with its strategy. Therefore, we reiterate our EUR 5.0 target price and Buy recommendation.

Top line beat, but result misses our forecast mainly due to one-offs that increase cost structure

Thanks to acquisitions, Solwers' H1 revenue jumped 20% year-on-year to 39.9 MEUR. According to the company, organic growth has been slightly positive, while we expected organic revenue to decline in H1 reflecting the sluggish market situation. Despite exceeding top-line forecasts, Solwers' EBITA remained at 3.3 MEUR, below our forecast of 3.6 MEUR. However, it should be noted that the contingent consideration for the acquisitions increased the cost structure by approximately 0.2 MEUR and the costs for the transition to the main list by just under 0.1 MEUR. In practice, these are of the same magnitude as the forecast miss, and so the operative underperformance is largely driven by non-recurring items. Overall, we estimate that the weakest period of reduced demand due to subdued economic activity was experienced in the early part of the year, which is likely to have been reflected in efficiency losses in some group companies. Taking this and the non-recurring items into account, we do not draw any major conclusions about the unsatisfactory level of profitability in H1.

Outlook unchanged, no major changes to forecasts

In its H1 report, Solwers reiterated its previous outlook and expects the business environment to improve towards the end of 2024. This was in line with our expectations, and we have maintained our forecast of stable organic revenue for the rest of the year. We expect this year to be the market bottom but reflecting the sluggish residential construction market and its indirect impact on Solwers' business, we have slightly eased our organic growth forecast for next year. We have also factored the two recent acquisitions into our forecasts. Overall, we have slightly lowered our earnings forecasts for this year and the next, while raising our earnings forecast for 2026 somewhat. The financial position at the end of H1'24 allows for further inorganic growth, which Solwers also mentioned in the report.

Room for improvement in balance sheet utilization

Overall, we believe that the earnings-based multiples based on our estimates for the current year are elevated, but on the other hand, they do not fully take into account the acquisitions already made. We believe that the valuation multiples for 2025 are quite reasonable (2025 P/E ratio 13x and EV/EBIT 12x). The same earnings-based valuation picture is also reflected in the relative valuation, where the company is valued at a discount to its peers. Our cash flow model, which is at our target price level, also points to an undervaluation. In our view, the key driver of value growth is a more efficient use of balance sheet capital, as the stock is moderately valued on a balance sheet basis. On the other hand, this presupposes that the capital revenue, which has weakened in recent years, and thus the return on capital can be raised to a higher level through successful capital allocation.