Wärtsilä Q4'24: Wind in the sails

Translation: Original published in Finnish on 2/6/2025 at 9:18 am EET.

Wärtsilä ended 2024 on a strong note, delivering better-than-expected order growth driven by Storage. The company confirmed a favorable demand outlook for 2025, and profitability is also structurally on an uptrend, particularly from growth and improved distribution in the service business. We see the valuation as attractive for a company with a growth outlook supported by megatrends and a high ROI, so we reiterate our Accumulate recommendation and raise our target price to EUR 21 (previously 19.5).

Better-than-expected order growth and cash flow

Wärtsilä's Q4 order intake was 2,491 MEUR, up 34% year-on-year (our forecast +22%, consensus +8%). The above-forecast growth was mainly generated by the less profitable energy storage business. Order trends in the other main segments were broadly in line with consensus expectations. In Q4, the share of the service business was higher than expected, resulting in slightly better-than-expected profitability (adj. EBIT 2% above the consensus). The board's dividend proposal of EUR 0.44 per share was in line with our forecast, but slightly above consensus
(EUR 0.42). The company's cash position developed strongly during 2024 (net cash 777 MEUR), clearly exceeding our forecast. However, the company indicates that the current working capital position is not fully sustainable and that capital is likely to be committed during 2025.

Demand outlook favorable, although some threats remain

As expected, Wärtsilä reiterated its previous view that the demand environment for the next 12 months (Q1'25-Q4'25) will be better than the comparison period in both Marine and Energy. However, the company added that the current significant external uncertainties make it difficult to forecast the future, which could mean, for example, that the company's engine power plants in the US could become less competitive relative to local gas turbine power plant manufacturers. Wärtsilä's profitability is on a structural upward trajectory as the company increases the share of its services business, especially the share of high value-added services. At the press conference, the company expressed confidence that the 12% EBIT margin target can be achieved in the next few years. Our current forecasts assume that the adj. EBIT margin will increase to 11.4%-11.8% in 2025-26 (2024: 11.1%). We raised our 2025-26 EBIT forecasts by 3% and 2%, supported by the high order intake and good profitability in Q4.

A growing and profitable engineering company with a low valuation

Wärtsilä's return on investment is high (2024 ROI: 23.7%) and the long-term growth of the company's business will benefit from, among other things, the decarbonization of shipping and the increasing share of renewables in the energy system. In this context, we believe that the current valuation of the company remains attractive despite the recent share price increase. Even at the current target price, the share would be more than 20% cheaper than the peer group. With EV/EBIT multiples of 12-14x, the fair value of the share would be between EUR 20-23, plus a dividend yield of 3%/year. In addition to earnings growth, potential divestments that could free up capital could also drive the share price. However, the company's balance sheet is already net cash positive, so acquisition-led growth could also become an option in the coming years if the company can find a suitable target.