Transtema: Q1 Preview – Tough Weather Conditions Likely to Pressure Margins
Research Update
2024-04-11
07:41
Redeye lowers its forecasts for Q1 while leaving the rest of 2024 roughly unchanged. While we expect a soft Q1 due to adverse weather conditions, we believe the current valuation implies low expectations on growth and margins mid-term.
FN
Fredrik Nilsson
Contents
Adverse Weather Conditions in Q1
Roughly Unchanged Expectations for the Remaining 2024 and 2025
Base Case Unchanged at SEK29
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Revenues | 2,692.7 | 2,503.4 | 2,603.4 | 2,707.5 | 2,761.6 |
Revenue Growth | 9.0% | -7.0% | 4.0% | 4.0% | 2.0% |
EBITDA | 191.1 | 225.1 | 235.1 | 244.8 | 256.0 |
EBIT | 58.6 | 91.9 | 104.9 | 115.5 | 126.6 |
EBIT Margin | 2.2% | 3.7% | 4.0% | 4.3% | 4.6% |
Net Income | 171.9 | 65.6 | 75.7 | 84.0 | 92.6 |
EV/Sales | 0.3 | 0.2 | 0.2 | 0.1 | 0.1 |
EV/EBIT | 12.6 | 6.4 | 4.7 | 3.3 | 2.1 |
Like Q1 last year, we expect bad weather conditions to impact margins in Q1 negatively. We believe the overall weather conditions in Norway and Sweden were somewhat worse in Q1 2024 relative to Q1 2023, where adverse weather mainly affected Transtema’s operations in Norway. Snow makes installations much more time-consuming, resulting in higher costs for Transtema for the same revenue. Thus, we leave our sales forecasts unchanged while reducing our margin assumptions for Q1 2024 – related to the installation business. Although we expect Transtema’s support and maintenance operations to be largely unaffected, following the acquisitions of Tessta and UBConnect, the exposure to installation and sensitivity to weather conditions have increased.
Overall, we expect -15% organic growth and no contribution from M&A. We forecast an EBITA margin of 2.5% (4.7) – excluding any one-offs related to the IT attack against TietoEVRY, affecting some of Transtema’s business for ten days.
Estmates | ||||||
Sales | Q1E 2024 | Q1A 2024 | Diff | Q1A 2023 | Q4A 2023 | |
Net Sales | 549 | 1861 | 239% | 646 | 726 | |
Y/Y Growth (%) | -15% | 188% | -16% | -6% | ||
Earnings | ||||||
EBITA | 14 | 170 | 1138% | 30 | 38 | |
EBITA Margin (%) | 2.5% | 9.1% | 4.7% | 5.3% | ||
Diluted EPS | 0.10 | 0.94 | 819% | 0.23 | 0.44 |
We lower our EBITA forecasts for 2024 by 5% due to reduced estimates for Q1 while keeping our forecasts for the remaining 2024 largely flat. We lower EBITA for 2025 by 4%, following softer overall expectations for Q1s in general. While we believe investors should expect a soft Q1 2024 – to a somewhat higher degree compared to our Q4 Update – we believe announced orders, a slight improvement in the market, and the cost-saving initiatives set Transtema for a 2024 of gradual improvements in margins and organic sales growth rate.
Although we mentioned a slight improvement in the market, we believe the competition for larger deals is likely to be tough. We expect Transtema to avoid potentially unprofitable deals, which we believe is a wise long-term strategy. Nevertheless, we believe Transtema can gain significant deals in the current market.
Estimate Revisions | ||||||
Sales | FYE 2024 | Old | Change | FYE 2025 | Old | Change |
Net Sales | 2501 | 2501 | 0% | 2601 | 2601 | 0% |
Y/Y Growth (%) | -7% | -7% | 4% | 4% | ||
Earnings | ||||||
EBITA | 117 | 123 | -5% | 130 | 135 | -4% |
EBITA Margin (%) | 4.7% | 4.9% | 5.0% | 5.2% | ||
Diluted EPS | 1.57 | 1.68 | -6% | 1.82 | 1.91 | -5% |
Forecasts | |||||||||
Sales | FYA 2023 | Q1E 2024 | Q2E 2024 | Q3E 2024 | Q4E 2024 | FYE 2024 | FYE 2025 | FYE 2026 | FYE 2027 |
Net Sales | 2689 | 549 | 628 | 591 | 734 | 2501 | 2601 | 2705 | 2760 |
Y/Y Growth (%) | 9% | -15% | -12% | -2% | 1% | -7% | 4% | 4% | 2% |
Earnings | |||||||||
EBITA | 88 | 14 | 30 | 31 | 43 | 117 | 130 | 141 | 152 |
EBITA Margin (%) | 3.3% | 2.5% | 4.8% | 5.2% | 5.8% | 4.7% | 5.0% | 5.2% | 5.5% |
Diluted EPS | 3.19 | 0.10 | 0.41 | 0.42 | 0.64 | 1.57 | 1.82 | 2.01 | 2.22 |
Despite the slight cuts in our short-term forecasts, we retain our Base Case of SEK29. Although we expect a short-term headwind, trading at 5x and 4x EBITA 2024e and 2025e, respectively, we still see substantial potential, given improved operational performance mid-term.
Fair Value Range - Assumptions | |||
Bear Case | Base Case | Bull Case | |
Value per share, SEK | 11 | 29 | 42 |
Sales CAGR | |||
2024 - 2031 | -1% | 3% | 4% |
2031 - 2041 | -1% | 2% | 4% |
Avg EBIT margin | |||
2024 - 2031 | 2% | 4% | 5% |
2031 - 2041 | 4% | 5% | 6% |
Terminal EBIT Margin | 2% | 5% | 6% |
Terminal growth | 2% | 2% | 2% |
WACC | 10% | 10% | 10% |
Source: Redeye Research |
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 29
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 | 2023 | 2024e | 2025e | 2026e |
Revenues | 2,692.7 | 2,503.4 | 2,603.4 | 2,707.5 |
Cost of Revenue | 1,284.6 | 1,250.7 | 1,300.7 | 1,352.7 |
Operating Expenses | 1,213.0 | 1,025.6 | 1,065.6 | 1,107.9 |
EBITDA | 191.1 | 225.1 | 235.1 | 244.8 |
Depreciation | 23.5 | 20.0 | 17.1 | 16.1 |
Amortizations | 29.9 | 25.2 | 25.2 | 25.2 |
EBIT | 58.6 | 91.9 | 104.9 | 115.5 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | -80.3 | -7.8 | -7.8 | -7.8 |
Net Financial Items | 281.1 | 7.8 | 7.8 | 7.8 |
EBT | 179.2 | 84.1 | 97.0 | 107.6 |
Income Tax Expenses | -6.7 | -18.5 | -21.3 | -23.7 |
Net Income | 171.9 | 65.6 | 75.7 | 84.0 |
Balance sheet | ||||
Assets | ||||
Non-current assets | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Property, Plant and Equipment (Net) | 34.6 | 26.7 | 25.2 | 25.3 |
Goodwill | 381.2 | 381.2 | 381.2 | 381.2 |
Intangible Assets | 334.7 | 309.5 | 284.3 | 259.1 |
Right-of-Use Assets | 189.2 | 189.2 | 189.2 | 189.2 |
Other Non-Current Assets | 2.7 | 2.7 | 2.7 | 2.7 |
Total Non-Current Assets | 942.4 | 909.4 | 882.7 | 857.6 |
Current assets | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Inventories | 23.5 | 25.0 | 26.0 | 27.1 |
Accounts Receivable | 334.7 | 325.2 | 338.2 | 351.7 |
Other Current Assets | 346.4 | 325.2 | 338.2 | 351.7 |
Cash Equivalents | 67.1 | 124.8 | 225.1 | 332.1 |
Total Current Assets | 771.7 | 800.1 | 927.5 | 1,062.6 |
Total Assets | 1,714.1 | 1,709.5 | 1,810.2 | 1,920.2 |
Equity and Liabilities | ||||
Equity | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 558.2 | 623.8 | 699.5 | 783.4 |
Non-current liabilities | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Long Term Debt | 163.3 | 163.3 | 163.3 | 163.3 |
Long Term Lease Liabilities | 116.7 | 116.7 | 116.7 | 116.7 |
Other Long Term Liabilities | 104.0 | 104.0 | 104.0 | 104.0 |
Total Non-Current Liabilities | 384.0 | 384.0 | 384.0 | 384.0 |
Current liabilities | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Short Term Debt | 0.00 | 0.00 | 0.00 | 0.00 |
Short Term Lease Liabilities | 75.8 | 75.8 | 75.8 | 75.8 |
Accounts Payable | 248.6 | 275.2 | 286.2 | 297.6 |
Other Current Liabilities | 447.0 | 350.2 | 364.2 | 378.8 |
Total Current Liabilities | 771.4 | 701.2 | 726.2 | 752.2 |
Total Liabilities and Equity | 1,713.6 | 1,709.0 | 1,809.7 | 1,919.7 |
Cash flow | ||||
SEKm | 2023 | 2024e | 2025e | 2026e |
Operating Cash Flow | 64.9 | 157.8 | 204.0 | 211.2 |
Investing Cash Flow | -62.7 | -12.1 | -15.6 | -16.2 |
Financing Cash Flow | 9.1 | -88.0 | -88.0 | -88.0 |
Disclosures and disclaimers
Contents
Adverse Weather Conditions in Q1
Roughly Unchanged Expectations for the Remaining 2024 and 2025
Base Case Unchanged at SEK29
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article