Talenom Q2'24: Organic growth doesn't come easy these days

We reiterate our Accumulate recommendation for Talenom but revise our target price to EUR 6.0 (previous EUR 6.3). Q2 results were in line with our expectations, but the operational development was not as favorable. In Finland and Sweden, organic growth was negative in a weak market environment, but on the cost side the measures taken are having the expected effect. Progress in Spain has been good and Sweden is also on track. In the coming years, we will see if Talenom in Sweden can improve productivity and profitability, which will likely determine the direction of the stock.

Growth challenges continued in Finland and Sweden

In Q2, Talenom’s revenue totaled 33.9 MEUR, up 4.5% year-on-year. Growth was weaker than we had expected (+8.2%) and came entirely from Spain, while in Finland and Sweden organic growth was negative in a difficult market. The lower-than-expected revenue in the company's profit machine, Finland, was also directly reflected in EBIT (4.3 MEUR vs. 5.2 MEUR forecast). Although Talenom's reported Q2 EBIT (4.5 MEUR) was in line with our forecast (4.6 MEUR), the figure was boosted by a booking of +0.6 MEUR in unallocated items, i.e., the revaluation of additional purchase prices for acquisitions. This non-business item saved the company from an earnings miss in Finland in Q2. In Sweden and Spain, the performance was slightly better than we had expected, with EBITDA of +0.4 MEUR in both countries. In Sweden, the main priority at the moment is to make progress with the implementation of the company’s own software and to complete other integration work. However, the introduction of proprietary software is expected to weigh on Swedish profitability throughout 2024. Spain, on the other hand, seems to be progressing better than expected, both in terms of profitability and organic growth.

Small negative operational revisions to forecasts, but guidance should hold

Talenom reaffirmed its guidance for 2024 with revenue of approximately 130-140 MEUR, EBITDA of 34-40 MEUR and EBIT of 14-17 MEUR. Our forecasts were already at the lower end of the guidance range, and the revenue guidance remains challenging due to the weak market outlook in Finland and Sweden. Our EBIT forecast for 2024 (14.3 MEUR) has increased slightly (was 14.1 MEUR), but this is explained by the revaluation of the aforementioned additional purchase prices. This will enable Talenom to meet its earnings guidance despite weaker-than-expected market developments. We lowered our earnings forecasts for the coming years by around 3% in line with the growth outlook, but organic growth still has the potential to accelerate rapidly as the market recovers. In terms of profitability, Sweden and Spain in particular seem to be on the right track, although current levels are of course still weak. In terms of internationalization, the next few years will be critical as 1) Sweden should gain efficiencies from the roll-out of own software and 2) organic growth should start to accelerate in both Sweden and Spain.

Valuation is reasonable, but requires success abroad

Talenom's valuation is quite attractive out to 2025 (P/E 21x and EV/EBIT 17x), but this includes strong earnings growth. EBIT continues to come solely from Finland next year, which means that the value of the Swedish and Spanish businesses will not be reflected in the earnings multiples. Our sum-of-the-parts calculation now indicates a value of around EUR 6.0-6.2 per share (was EUR 6.3), after a slight decline in Finnish earnings forecasts weighed on its value. The Swedish and Spanish values are quite close to their book values (around EUR 1.6 per share). If even a moderate part of the Finnish success story could be replicated overseas in the coming years, the stock would be very cheap in the medium term.