Wärtsilä Q2'24: Good outlook already priced into the stock

This report is a summary translation of the report “Hyviä näkymiä on leivottu tarpeeksi hintaan” published on 7/22/2024 at 8:20 am EEST.

We reiterate our Reduce recommendation for Wärtsilä and raise our target price to EUR 17.00 (was EUR 16.50) after the good Q2 report, reflecting our positive forecast changes. Wärtsilä's brisk earnings growth pattern is likely to continue next year, but we believe that the stock already has enough earnings growth expectations built in, with the share price up almost 80% over the past year. As a result, we think the earnings growth is being swallowed up by the higher multiples, and the stock's expected return next year is therefore below the required return.  

Earnings growth continued as expected in Q2, both in terms of revenue and margin

In Q2, Wärtsilä increased its revenue by 7% to 1,556 MEUR and its adjusted EBIT by 63% to 176 MEUR (Q2 adj. EBIT-% 11.3%). Wärtsilä's new orders increased by 10% to 1,854 MEUR in Q2, and the company's order book at the end of Q2 was 7.6 BNEUR, 22% higher than in the comparison period, thanks to a positive book-to-bill ratio. The company's profitability and order book were well above our forecasts, so the report was better than expected in terms of key figures. Wärtsilä's profitability also clearly exceeded consensus expectations. A significant part of the outperformance in profitability and orders was generated by Portfolio Business, which is planned to be sold, but the development of key figures in the core businesses was also in line with or better than expected, especially in Marine.  

We made slightly positive forecast changes after good report

As expected, Wärtsilä reiterated in its Q2 report its previous view that the demand environment for the next 12 months (Q3'24-Q2'25) will be better than the comparison period in both Marine and Energy. Comments on the market outlook were positive, and the company's order book provides quite good visibility for the rest of the year and into next year, together with a healthy demand outlook for most businesses. In H2, Wärtsilä's revenue should accelerate as the equipment projects (especially in Energy) progress, but due to a more equipment-focused sales mix, the company warned that Q2 EBIT-% would unusually remain the peak of the current year (Q4 is typically Wärtsilä's most profitable quarter of the year in relative terms). Following the good report, we raised Wärtsilä's revenue and margin forecasts for this year and the coming years in the Portfolio Business and Marine. The Energy forecasts were kept unchanged. Group-level forecasts at the adjusted EBIT level were increased by 1-5%, but due to small increases in financial cost forecasts, changes at the EPS level were smaller. We expect Wärtsilä's adjusted EBIT to grow at an annual rate of around 5-10% in the coming years, mainly driven by revenue, after this year's significant earnings leap. The main risks to our forecasts relate to the global economy, energy transition trends and geopolitics.

Good outlook already priced in

In our estimate, Wärtsilä's adjusted P/E ratios for 2024-2025 are 22x and 20x, while the corresponding EV/EBIT ratios are 15x and 14x. This year's multiples are around Wärtsilä's relatively high medium-term median levels (partly due to zero interest rates and weak performance), and next year's multiples are slightly lower. In relative terms, Wärtsilä's stock is priced slightly below the peer group on an earnings basis, but in our view the peer group's valuation already looks quite demanding. Wärtsilä's DCF value is also slightly below the share price and at the level of our target price. As a result, we believe that Wärtsilä's still good earnings growth prospects are appropriately priced into the stock. In our view, earnings growth is thus buried under the downside in the valuation, and we do not see Wärtsilä's expected return at the current share price level as attractive for further purchases.