Both sales and adjusted EBITA came in below our forecasts due to a harsh Norwegian winter, hurting both Tessta and UBConnect. Sales was SEK646m (445), 9% below our expectations, and the organic growth was 1.1%. Adjusted EBITA was SEK37m (28), 23% below our expectations. Tessta has been unable to dig (fibre), and UBConnect has been unable to climb (4G/5G). While the Norwegian winter is harsh sometimes, and we might have to adjust our forecasts to Transtema’s current seasonality, we believe the prospects for 2023 remain solid.

Besides the harsh Norwegian winter, Transtema states cost inflation and FX (weak NOK vs EUR resulting in SEK3m extra costs for subcontractors) hurting margins. While Transtema’s contracts are generally indexed, there is a lag that temporarily reduces margins. The cost inflation has been a factor for several quarters, where Transtema has managed to keep a solid margin. Thus, we do not see that as a substantial threat going forward.

From Q2 and onwards, as ground and 5G towers are free from ice and snow, we expect Transtema’s Norwegian business to pick up its operations at a solid rate. While UBConnect likely will see lower demand following some 5G installations being postponed into 2024, we believe there is an opportunity for Tessta to catch up on its fibre installations.

Sweden had a strong Q1, growing 4.4% organically, which considering the structural downturn in copper, is a healthy level in our view. While Transtema does not disclose its EBITA margin for Sweden, management states it was solid. Also, assuming a very modest margin in the Norwegian business this quarter, Sweden must have done a solid quarter considering the group-level adjusted EBITA margin of 5.7%. Although the margin did not match our forecasts and Transtema’s target of >7%, it is still a decent level, significantly above most competitors.

Note that the quarter’s EPS was positively affected by a write-down of an expected earn-out. We believe it is related to Tessta, which was acquired with a large earn-out. While a write-down of an expected earn-out often indicates soft performance in the acquired company, we do not believe that is the case this time.

In February, Transtema announced a settlement agreement with GlobalConnect regarding quality issues in FTTH construction work during 2016-2018 by a subsidiary in Transtema that was liquidated in 2019. Transtema will pay GlobalConnect SEK35m to close all disputes between them. In the most recent quarterly report, the maximum payment obligation was SEK121m. Transtema no longer has any operations of that kind that caused the dispute.

According to Transtema’s legal advisor, the risk of losing the case was high, and a settlement of SEK35m was reasonable. As Transtema generated SEK174m in EBITA in 2022, SEK35m is less than its quarterly EBITA and, thus, nothing that has a major effect on Transtema’s financials. In addition to eliminating the risk of losing the case and a larger payment, the settlement enables Transtema to improve its relations with a potentially large customer.

All in all, Transtema pays SEK35m for its old sins, and in return, it gets the opportunity to strengthen its relationship with GlobalConnect. As it relates to Transtema’s old business and as the sum is rather small, our positive view of Transtema is intact. The SEK35m will not affect EBITA and is reported as result from discontinued operations.

In February, Transtema made a direct share issue of SEK63. While we believe it is reasonable to evaluate the rights issue first when we know how Transtema will invest the funds, we note that it added several long-term institutional investors, such as Case Fonder, Swedbank Robur, and Cicero Fonder, to the owner list – which we consider that positive.

While Transtema’s weather dependency might motivate a somewhat higher risk premium, we believe Transtema is on track for a solid full year in 2023. The postponed demand from 5G is a risk to 2023, but management has taken measures to offset that effect. Apart from that, management sees a continuing solid demand in both Sweden and Norway and retains its 7% EBITA margin target for the full year 2023, which is a high level in the sector. Also, we would not rule out that at least Tessta, focusing on fibre installations in Norway, could catch up with some of the lost revenue in Q1 during the rest of 2023.

We lower our sales forecasts somewhat for the rest of 2023 following the postponed 5G installations. Regarding EBITA, we make minor downward revisions of our margin assumptions for 2023 and 2024. However, the major driver of the 10% cut in EBITA 2023e, is the lower outcome in the quarter.

We expected Transtema to reach 6.7% for 2023, implying levels slighlt above 7% for the remaining three quarters.

We lower our Base Case to SEK52 (55) due to lowered estimates for 2023 and a slight reduction in our 2024 and onwards forecasts. However, we believe the >20% share price decline since the report is exaggerated. We believe Transtema is heading towards a solid 2023, and the current valuation of 5.8x and 4.6x EBITA 2023 and 2024 implies a significant upside, given that Transtema’s performance is in line with our forecasts. Despite the somewhat lowered Base Case, it is roughly 2x the current share price.

Transtema is trading at a discount to peers for 2023e. Its margins are among the highest, and it has had a solid track record since its transformation. We thus believe a premium is justified, and our base case of SEK52 is equivalent to ~10x 2023e EBITA.