Last week Transtema announced layoffs in its copper- and 5G-related businesses. Roughly 80 employees in Sweden, 60 in Norway and 60 in Eastern Europe are affected. We believe all 80 persons in Sweden are related to copper, and all 120 in Norway and Eastern Europe are related to 5G. Although roughly similar in size, the copper-related layoffs were expected and are, in our view, a non-event, while the 5G layoffs impact our forecasts and Base Case.

While Transtema highlighted a weaker demand for 5G installation in Q1 2023 report, which Transtema is mostly exposed to through UBConnect (acquired in November 2022) on the Norwegian market, we did not expect such a significant layoff. According to management, the uncertainty seen in Q1 remains within 5G and therefore, management believes a cost reduction is necessary. However, we believe investments in 5G in the Nordics will take off within the next 2-3 years, although it seems like telcos have a hard time monetizing 5G so far.

As Transtema acquired UBConnect recently, the soft development might raise concerns that Transtema is remaking its mistakes from the Sweden FTTH boom – where it made many acquisitions that did not turn out well. However, we do not believe that is the case. The demand for installations tends to be volatile to some extent, and being active in adjusting capacity is how businesses can adapt – as Transtema is doing. Also, about 50% of the purchasing price was in earn-outs, limiting the downside in case the soft development in UBConnect continues.

While 120 people related to 5G is about half of the employees UBConnect had at the time of the acquisition, we believe the company was staffed for growth. Compared to the NOKc440m UBConnect had in sales in 2022, we expect a current run-rate of NOKc350m.

We lower our sales forecasts for 2023 and 2024 by 4% due to the lowered demand for 5G, which we expect to impact 2024 to some extent as well. We reduce our EBITA and EPS forecasts by c20%, as we expect the low demand in 5G to hurt margins in primary Q2 and Q3. For Q4 and 2024, we expect the SEK60m in cost savings to impact margins gradually. Note that our forecast excludes the SEKc8m in restructuring costs Transtema expects in Q2.

We lower our Base Case from SEK53 to SEK 47 on the back of the estimate revisions. At SEK18.06, the share is trading at 5.1x EBIT 2023e and 3.3x 2024e. Our Base Case of SEK47 equals 10x EBIT 2024e.

Transtema is trading at a discount to peers for 2023e, despite its margins being among the highest. Also, it has had a solid track record since its transformation.