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.

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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Key financials

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

Adverse Weather Conditions in Q1

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

Roughly Unchanged Expectations for the Remaining 2024 and 2025

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

Base Case Unchanged at SEK29

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

Investment thesis

Case

From construction to installations, operations, and maintenance

Following a few years with a focus on Fiber-To-The-Home (FTTH) construction which ended badly, Transtema has reshaped its business, concentrating on stable installations, operations, and maintenance markets. With its nationwide reach in Sweden and substantial presence in Norway, Transtema has a solid position to capture growth stemming from structural trends driving the need for the availability and reliability of communication networks. In addition, recent EV charging and coax acquisitions allow for higher utilization of the nationwide service network and reduced customer concentration.

Evidence

Stability, margins, and growth in place following the recent transformation

Since the transformation towards installations, operations, and maintenance in 2020, Transtema has delivered stable EBITA margins of ~7%, among the highest levels in the industry. Despite the eroding copper business, Transtema has achieved solid organic growth fueled by 5G and fiber installations. The acquisition of Tessta has been a success so far. Combined with the offering-expanding acquisitions of North Projects and Bäcks, Transtema has reduced customer concentration and improved its growth prospects.

Challenge

Exposure to legacy technology

With about 20% of sales stemming from copper, Transtema will experience a growth headwind as copper is expected to erode over the next few years. However, the decline of legacy technology and the rise of new solutions is a normality in the communications industry. Although Transtema needs to compensate with revenue from newer technologies, following recent acquisitions in, for example, the surging EV charging sector, and the site-management deal, we believe the prospects are solid.

Challenge

Significant customer concentration

Although the customer concentration has decreased following recent acquisitions, Transtema generates about 40% of its sales from Telia. While a few huge players characterize the telecommunications market, we believe customer concentration is a risk in Transtema. On the other hand, Telia also depends on Transtema, as it would be challenging for a competitor to provide similar services, at least in the short term. Following the recent acquisitions, we believe the customer concentration will decrease further.

Valuation

Fair Value SEK 29

Our DCF model shows a fair value of SEK 29, which is also supported by a peer valuation. While the strong performance seen in 2021-22 motivates a premium to the sector, Transtema has experienced a negative impact from the weaker market, hurting margins and growth.

Quality Rating

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.

Financials

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

Rating definitions

The team

Disclosures and disclaimers

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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