Review of Q1 2024

Sales was SEK500m (646) and came in 9% below our forecast of SEK549m. Organic growth was negative 27%, while our forecast was -15%. Sales in Sweden was -24% organically due to the liquidation of copper networks and a lower overall demand. Although Transtema has signed some larger deals – where most will positively impact H2 2024 and beyond – it has not been enough to compensate for the rather rapid decline in copper in H2 2023 – H1 2024. However, as the revenue from copper likely will be phased out completely by the beginning of 2026, the downside from here is not that significant. Along with Transtema’s order inflow – where the recent pan-Nordic support and maintenance deal with GlobalConnect is the highlight, see below for details – we believe Transtema’s structural headwind in sales growth will turn in 2025.

In addition, Transtema continues to see solid growth within the EV-charging segment and added several interesting contracts during the quarter. While strong momentum within the EV-charging segment is encouraging for the long-term outlook, the segment is still too small to have a notable impact on the group total.

Sales in Norway was -34% organically due to lower overall demand and adverse weather conditions. While Norway has no headwind from exposure to copper, Transtema’s installation-heavy operations are sensitive to weather and market demand.

Regarding both Sweden and Norway, Transtema is not churning its current deals nor failing to win a fair share of available deals (for example, Eltel won FMV, and Transtema won GlobalConnect – likely a more attractive deal for Transtema). Instead, deals are being postponed, and the number of new deals up for grabs is somewhat lower than usual.

All in all, we believe that organic growth is about to bottom out. We expect negative organic growth in 2024 and gradual improvements during the year. In 2025, when we expect the exposure to copper to be limited, we assume Transtema will get back to organic growth thanks to new larger orders kicking in gradually. Also, we believe the soft performance is due to the market situation rather than Transtema executing badly – For example, neither Netel’s Telecom division nor Eltel’s Sweden+Norway made any money in Q1. Considering that Transtema’s and its peers’ offerings are vital to modern society, it is clearly debatable whether their limited or non-existent profitability is desirable and sustainable in the long run from society’s perspective.

EBITA (adjusted for SEK7.1m one-offs related to the data breach at Tietoevry) was SEK3m (37). Our forecast was SEK 14m. The adjusted EBITA margin was 0.6%, compared to 5.7% in Q1 2023, and below our forecast of 2.5%. Although Q1 is a seasonally soft quarter, due to the cycles of the installation business, the weak market and tougher-than-usual weather conditions hurt margins more than expected. Management points out that margins are sensitive to sales volume in the short term, suggesting solid improvements in margins given an uptick in volumes.

While Q1 was a weak quarter, we believe there are many reasons to expect improvements over the coming quarters. First, Q1 is seasonally soft. Second, cost-saving initiatives will likely have a larger positive impact going forward. Third, many of Transtema’s new larger deals will start having a positive impact from H2 2024 and onwards. Thus, although we do not expect Transtema to reach its ambitious 7% EBITA margin target, we expect Q1 2024 to be the bottom in terms of profitability.

On a positive note, operating cash flow was strong at SEK62m, thanks to a reduction of working capital driven by the sharp decline in sales q/q and structural improvements. Transtema ended the quarter with SEK98m in cash and interest-bearing debt of SEK165m, resulting in a limited net debt. However, we expect earn-outs of about SEK120m to be paid out over the next few quarters, which Transtema can handle with its current credit facility and cash.

This text is from our Note published 3 May.

In early May, Transtema announced (PM in Swedish) a 3-year deal (with an option of +3 years) regarding support and maintenance on all four Nordic markets – Sweden, Norway, Finland, and Denmark – with GlobalConnect. The deal is worth about SEK200m during the first three years.

While the initial SEK200m over three years might not seem that significant in relation to Transtema’s 2023 sales of SEK2.7bn, we believe this deal is important and strengthens the investment case in Transtema for the following main reasons:

Although the market currently experiences some pricing pressure, as far as we understand, the pricing on this deal is fair and does not jeopardize Transtema’s financial targets.

We cut our sales and EBITA forecast by 9% and 6%, and 27% and 7% for 2024 and 2025, respectively. The large cut in 2024 is due to the weak outcome in Q1 and its implications on our expectations for the next few quarters. Regarding 2025, we only lower our forecasts slightly due to the recently announced pan-Nordic support & maintenance deal with GlobalConnect. With a limited headwind from copper and new deals to drive growth, we expect Transtema to reach a decent margin of 4.9% on the EBITA level in 2025 – although still well below the 7% target, implying greater potential in a positive scenario.

We decreased our Base Case from SEK29 to SEK25 based on the estimate revisions. However, our positive view is retained, and we believe this quarter sets the bottom for Transtema’s profitability. The company is trading at 4.2x EBITA 2025e. Although we expect significant margin improvements compared to R12m numbers, our 4.9% EBITA margin assumption remains below the company’s 7% target.

Transtema is trading at a discount (20-25% on EB/EBIT) to peers for 2025-26e, despite our margin assumptions being far below the company target of 7% (on EBITA). If Transtema can return to growth with margins approaching its 7% target, we believe it deserves a valuation multiple at least in line with peers.