Wärtsilä Q3'24: Here we go again

Translation: Original published in Finnish on 10/30/2024 at 8:15 am EET.

Wärtsilä's Q3 order intake was below expectations, mainly due to Energy, but profitability was better than forecast, also due to Energy. The company’s demand outlook remains strong. Thanks to the solid performance in storage and Portfolio Business, we have significantly raised our margin forecasts for the group. After the share price decline we have seen and the upgrades to our earnings forecasts, the stock is once again attractively valued on multiple metrics. We raise our recommendation back to Accumulate and, following our forecast changes, increase our target price to EUR 19.50 (was EUR 18.00). 

Mixed figures in Q3

Wärtsilä's Q3 order intake (+1% y/y) was clearly below both our own expectations (+9% y/y) and the consensus (+7% y/y). Orders were particularly weak in Energy (-19% y/y) due to an 80% year-on-year decline in storage orders. However, Wärtsilä expects storage order intake to pick up in Q4 and explained that the weak order flow in Q3 was due to "the timing of some large orders". As expected, Wärtsilä's order intake was positively impacted by the Portfolio Business, which grew 69% year-on-year. The group's Q3 EBIT margin was slightly above consensus and more clearly above our own estimates. In Marine, the difference to forecasts was negative as profitability was weighed down by an unfavorable mix within services. However, Energy's EBIT margin was well above our forecasts, driven by a strong increase in storage profitability. The group's margins were also supported by the Portfolio Business, which achieved its best EBIT margin ever (9.0%). The group's net financial expenses were slightly lower than expected, as was the tax rate, resulting in adjusted EPS coming in quite well above expectations. 

Profitability forecasts on the rise

Wärtsilä commended the market outlook for both Marine and Energy. In Wärtsilä's key segments, activity is strong in cruise ships and also in offshore vessel services. In addition, Marine's demand is driven by decarbonization, including the retrofitting of environmentally friendly engines. Energy's strongest demand driver is the increased need for balancing power driven by the green transition, and the company also highlighted the additional demand for power generated by artificial intelligence and data centers. As expected, Wärtsilä reiterated its view that the demand environment for the next 12 months will be better than the comparison period in both Marine and Energy. Our revenue forecasts for 2024-2026 have been lowered by 1...4% following the disappointing order intake seen in Q3. However, due to a positive surprise in the profitability of storage and Portfolio Business, we have significantly raised our margin projections for these businesses. Our new EBIT margin forecasts for the group as a whole for 2024, 2025 and 2026 are 10.6% (was 10.3%), 11.4% (was 10.7%) and 11.7% (was 11.0%), respectively.   

Valuation is back to an interesting level

Based on EV/EBIT-based calculations for 2025, the total expected return on the stock is +15% p.a. The expected return is thus well above the required return of around 8%, meaning that the risk-adjusted expected return for the stock is attractive. Wärtsilä’s 2025 P/E and EV/EBIT ratios (17x and 12x) are 26...32% below the median of the peers. In our view, the discount is now higher than can be considered acceptable given the high valuation multiples of the peer group. Our DCF model indicates a +14% upside potential for the share, which is reasonable.