Transtema: Softer Markets Hurting
Research Update
2023-11-06
06:45
Redeye maintains its positive view despite lowering its Base Case and forecasts significantly. Organic sales growth was -16% y/y and while the EBITA did not match our expectations, the EBITA margin increased somewhat q/q. Despite the significant cut in our Base Case, where our new assumptions are much more defensive, Transtema is still trading at a substantial discount to our revised Base Case.
FN
RJ
Fredrik Nilsson
Rasmus Jacobsson
Contents
Softer Markets and Weather Hurting Sales and Margins
Revaluations of Earn-outs Affecting Net Financials and EPS
Financial Forecasts
Valuation
Peer Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Sales was SEK603m (617) and came in 14% below our forecast of SEK702m. Organic growth was negative 16%, while our forecast was -2%. Sales in Sweden was -15% organically due to the liquidation of copper networks and a lower overall demand. Sales in Norway was -19% organically due to postponed orders following the storm “Hans” and lower overall demand. EBITA (adjusted for SEK16m in restructuring costs) was SEK21m (47.1). Our forecast was SEK 32m. While short of our forecast, far from the >7% target, and declining y/y, the adjusted EBITA margin increased q/q to 3.5% compared to 3.0% in Q2 2023.
We lowered our sales forecast for 2024 by 15% and reduced our EBITA forecast by 34%. While several factors are pointing towards improving organic growth and EBITA margin from now on – such as the 5G deal with Telenor and a better momentum in the later parts of the quarter – our previous forecasts were based on stronger market conditions. However, we still expect gradually improving margins. For 2024, we expect a negative organic growth of 7%, below Transtema’s target (+10% total growth) but still a substantial improvement compared to the current run rate. Regarding the EBITA margin, we forecast 4.7%. Although management seems rather optimistic about Q4 and 2024, we take a slightly more defensive approach.
We lowered our Base Case from SEK42 to SEK26 on the back of the estimate revisions and a raised WACC, following us increasing the risk-free rate from 2.5% to 3%. The bulk of the reduction is related to lowered short- and long-term forecasts. Despite the significant cut in our Base Case, where our new assumptions are much more defensive, Transtema is still trading at a substantial discount to our revised Base Case. Thus, we believe the risk/reward is attractive if Transtema increases its EBITA margin to ~5% over the next two years – below its financial target of >7%. Transtema trades at 5.8x EBIT on our 2024e forecasts, compared to a peer median of 8.2x.
SEKm | 2021 | 2022 | 2023e | 2024e |
Revenues | 1,690.0 | 2,457.4 | 2,711.2 | 2,525.5 |
Revenue Growth | 20.3% | 45.4% | 10.3% | -6.9% |
EBITDA | 202.4 | 257.5 | 181.7 | 211.4 |
EBIT | 124.4 | 154.5 | 53.3 | 94.7 |
EBIT Margin | 7.4% | 6.3% | 2.0% | 3.8% |
Net Income | 90.5 | 117.9 | 165.3 | 42.7 |
EV/Revenue | 1.0 | 0.5 | 0.2 | 0.2 |
EV/EBIT | 13.5 | 7.9 | 11.3 | 5.8 |
Sales was SEK603m (617) and came in 14% below our forecast of SEK702m. Organic growth was negative 16%, while our forecast was -2%. Sales in Sweden was -15% organically due to the liquidation of copper networks and a lower overall demand. We have seen companies with exposure to the same markets, such as Waystream and Hexatronic, experiencing weaker demand in the Swedish market as well. Sales in Norway was -19% due to postponed orders following the storm “Hans” and lower overall demand. The overall demand for Transtema’s installation of fiber and 4G/5G seems to have declined faster than we expected during the quarter, which, along with the expected decline in copper and weather-related delays, drove the negative sales growth.
In addition, management states that it has lost some potential deals on pricing, where competitors have been aggressive. While competing with price probably would support growth short-term, Transtema does not want to engage in low/non-profitable contracts that might hurt profitability for many years. We believe that is a sound strategy.
EBITA (adjusted for SEK16m in restructuring costs) was SEK21m (47.1). Our forecast was SEK 32m. While short of our forecast, far from the >7% target, and declining y/y, the adjusted EBITA margin increased q/q to 3.5% compared to 3.0% in Q2 2023. The lower EBITA and margin than expected is likely a consequence of the lower organic sales. Although we expect Transtema to deliver solid profitability, it is worth noting that many peers have lower margins.
While the telecom market remained soft during the quarter, Transtema saw some positive signals later in the period. For example, Transtema has been invited to several larger procurements. Those signals give management hope for a possible gradual market rebound in 2024. Combined with the recently announced Swedish 5G deal with Telenor (see our comment), we believe there is a high likelihood for a better Q4, which is typically a seasonally strong quarter. Also, we note that the large Nordic Telecom carriers have reported rather strong Q3 reports, which could pave the way for additional investments in fiber and 5G.
On the other hand, we and management have been too optimistic in recent quarters. While Transtema has a solid revenue base, weather and binary deals can significantly impact marginal sales, which is important for profitability. Unlike in 2021-2022, where Transtema managed to compensate for the declining copper business very well, Transtema has not managed to do that in this softer market – where its share of non-recurring installation revenue has also increased. Although Transtema has reduced its cost base somewhat, combining -16% organic growth with sector-high profitability is too challenging.
Following the softer development in the Norwegian Business, Transtema revalues the earn-out to Tessta to a lower level, positively affecting financial income by SEK39m. On the other hand, following a stronger development than expected in the EV-charging operations, Transtema revalues the earn-out to North Projects. Although EV charging is a small part of Transtema today, seeing solid momentum in the area is encouraging. The underlying interest costs was SEK-10m, roughly matching our forecast. The net negative revaluation of earn-out has a substantial positive effect on EPS in the quarter.
We lowered our sales forecast for 2024 by 15% and reduced our EBITA forecast by 34%. While several factors are pointing towards improving organic growth and EBITA margin from now on – such as the 5G deal with Telenor and a better momentum in the later parts of the quarter – our previous forecasts were based on stronger market conditions. Also, as mentioned, other companies with similar exposure, such as Waystream and Hexatronic, are seeing a softer Swedish market. Although management seems rather optimistic about Q4 and 2024, we take a slightly more defensive approach.
For 2024, we expect a negative organic growth of 7%, far below Transtema’s (+10% total growth) but still a substantial improvement compared to the current run rate. We expect a gradual improvement in growth rates throughout the year. Regarding the EBITA margin, we forecast 4.7%. It is low compared to the >7% target and the level seen in 2021-22, but healthy compared to many peers in a soft market. In addition to the usual seasonality, with a weak Q1 and strong Q4, we expect a gradual improvement over the year.
While keeping our long-term sales forecasts roughly unchanged, we have lowered our long-term EBITA margin forecasts, now expecting an average of 5.0-5.5% 2025-2030.
We lowered our Base Case from SEK42 to SEK26 on the back of the estimate revisions and a raised WACC, following us increasing the risk-free rate from 2.5% to 3%. The bulk of the reduction is related to lowered short- and long-term forecasts.
Despite the significant cut in our Base Case, where our new assumptions are much more defensive, Transtema is still trading at a substantial discount to our revised Base Case. Thus, the risk/reward is attractive if Transtema increases its EBITA margin to ~5% over the next two years – below its financial targets. Transtema trades at 5.8x EBIT on our 2024e forecasts.
Transtema is trading at a discount to peers for 2023e on both EV/EBIT and EV/Sales, despite its margins being in line with the average.
Case
From construction to installations, operations, and maintenance
Evidence
Stability, margins, and growth in place following the recent transformation
Challenge
Exposure to legacy technology
Challenge
Significant customer concentration
Valuation
Fair Value SEK 26
People: 4
Transtema receives a high rating for People for several reasons. First, we believe management has relevant experience and a solid understanding of the market. Second, following operational and financial issues, its management has reshaped the business to profitability. Third, insiders, such as former CEO and current chairman Magnus Johansson, own a substantial share of Transtema. Fourth, we believe management’s communication is balanced and realistic.
Business: 4
Transtema receives a high rating for Business for several reasons. First, the group receives most of its revenues from operations, services, and maintenance, and ~35% is recurring. Second, the limited acceptance for communication networks’ downtime makes Transtema’s services vital to its customers. Third, Transtema has established nationwide operations with ~900 technicians and a presence in ~85 locations, implying significant investments and entry barriers for new players.
Financials: 3
Transtema receives an average rating for Financials. Recent improvements in organic growth, margins, and cash flows increase the rating, but its weak performance of a few years ago works in the opposite direction. Should Transtema be able to preserve its recent improvements in margins, which we find likely, we see the company heading for a higher Financials rating in the coming years.
Income statement | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Revenues | 1,404.8 | 1,690.0 | 2,457.4 | 2,711.2 | 2,525.5 |
Cost of Revenue | 602.0 | 578.3 | 1,175.5 | 1,307.7 | 1,262.7 |
Operating Expenses | 684.6 | 909.3 | 1,024.5 | 1,221.8 | 1,051.4 |
EBITDA | 118.2 | 202.4 | 257.5 | 181.7 | 211.4 |
Depreciation | -14.7 | -14.9 | -19.1 | -22.6 | -21.2 |
Amortizations | -25.7 | -13.0 | -19.8 | -29.6 | -24.0 |
EBIT | 16.2 | 124.4 | 154.5 | 53.3 | 94.7 |
Shares in Associates | 66.7 | 55.6 | 60.4 | 61.7 | 61.7 |
Interest Expenses | -10.2 | -10.5 | -39.8 | -75.9 | -40.0 |
Net Financial Items | 10.2 | 11.5 | 75.4 | 262.8 | 40.0 |
EBT | 7.6 | 115.0 | 150.3 | 164.4 | 54.7 |
Income Tax Expenses | 15.3 | -25.3 | -33.1 | 0.87 | -12.0 |
Net Income | 3.9 | 90.5 | 117.9 | 165.3 | 42.7 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Property, Plant and Equipment (Net) | 27.7 | 34.0 | 43.8 | 37.5 | 36.3 |
Goodwill | 76.7 | 68.7 | 319.4 | 392.9 | 392.9 |
Intangible Assets | 63.8 | 60.3 | 280.4 | 339.0 | 315.0 |
Right-of-Use Assets | 125.5 | 130.8 | 187.1 | 195.4 | 208.0 |
Other Non-Current Assets | 27.0 | 1.2 | 2.1 | 2.7 | 2.7 |
Total Non-Current Assets | 387.5 | 350.5 | 893.2 | 1,029.2 | 1,016.6 |
Current assets | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Inventories | 17.3 | 18.3 | 18.1 | 27.1 | 25.3 |
Accounts Receivable | 167.9 | 152.7 | 374.7 | 298.2 | 277.8 |
Other Current Assets | 120.8 | 160.4 | 223.3 | 325.3 | 303.1 |
Cash Equivalents | 64.9 | 177.8 | 93.3 | 41.4 | 95.7 |
Total Current Assets | 370.8 | 509.3 | 709.3 | 692.0 | 701.8 |
Total Assets | 758.4 | 859.8 | 1,602.5 | 1,721.3 | 1,718.4 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Non Controlling Interest | 0.55 | 0.94 | 1.2 | 0.67 | 0.67 |
Shareholder's Equity | 159.5 | 250.4 | 387.7 | 573.8 | 616.5 |
Non-current liabilities | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Long Term Debt | 19.0 | 25.1 | 100.8 | 166.6 | 166.6 |
Long Term Lease Liabilities | 79.6 | 78.3 | 118.7 | 117.5 | 117.5 |
Other Long Term Liabilities | 51.4 | 42.9 | 309.9 | 135.7 | 135.7 |
Total Non-Current Liabilities | 150.0 | 146.4 | 529.5 | 419.8 | 419.8 |
Current liabilities | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Short Term Debt | 49.0 | 13.8 | 25.7 | 0.00 | 0.00 |
Short Term Lease Liabilities | 47.6 | 55.5 | 71.1 | 76.9 | 76.9 |
Accounts Payable | 140.0 | 146.3 | 323.5 | 298.2 | 277.8 |
Other Current Liabilities | 211.7 | 246.5 | 263.9 | 352.5 | 328.3 |
Total Current Liabilities | 448.3 | 462.1 | 684.2 | 727.6 | 683.0 |
Total Liabilities and Equity | 758.4 | 859.8 | 1,602.5 | 1,721.8 | 1,719.9 |
Cash flow | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Operating Cash Flow | 161.2 | 210.5 | 109.1 | 31.9 | 159.3 |
Investing Cash Flow | 14.1 | -14.0 | -208.5 | -65.7 | -20.0 |
Financing Cash Flow | -128.5 | -83.9 | 14.8 | 9.5 | -84.0 |
Disclosures and disclaimers
Contents
Softer Markets and Weather Hurting Sales and Margins
Revaluations of Earn-outs Affecting Net Financials and EPS
Financial Forecasts
Valuation
Peer Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article