Yesterday, Transtema announced a two-year SEK500m deal (press release in Swedish). The deal is from a Swedish telecommunication equipment provider – considering the deal size and Transtema’s history, we believe it must be Ericsson. Transtema has previously had a smaller share of this deal, and we assume the net impact on sales is about SEK200m annually. The deal runs from the autumn of 2024.

The deal is a large commitment for both Transtema and the customer, likely implying potential for reasonable margins, additional orders, and extensions of the deal, but at the same time, it is a large responsibility for Transtema to execute well. Considering Transtema’s large commitment and strategy of avoiding very low-margin contracts, we believe this deal has a reasonable margin. The customer putting this deal at a single vendor, Transtema, also implies solid confidence in Transtema’s capabilities.

In addition to adding about 8% in annual sales, the deal has service-revenue characteristics. Along with the recently announced GlobalConnect deal, the new deal alters Transtema’s revenue mix to more stable service revenue. Following the increase in more volatile installation revenues – mainly driven by acquisitions – we are encouraged to see new deals boosting service revenue.

Also, we note that Transtema announced a deal with Tibber. While the SEK25m 2024 deal value is limited compared to Transtema’s total sales, the deal is one more sign that Transtema’s EV-charging segment is performing well and is gaining traction in the EV-charging space.

We expect a Q2 with an EBITA margin of 2.8% and -22% sales growth. While an improvement from the 0.6% adjusted EBITA margin and -27% sales growth seen in Q1 2024, the 2.8% EBITA margin roughly aligns with last year’s adjusted EBITA and is far below the company’s 7% EBITA margin target. However, as discussed below, the recent strong deal flow sets Transtema for stronger performance in late 2024 and 2025. We believe Q1 was the bottom and that gradual improvements will follow the assumed soft Q2. A possible negative market reaction to a soft Q2 could be an exciting opportunity for the longer-term focused investor.

We are encouraged to see Transtema add another large deal following the GlobalConnect deal announced in May. We believe it sets Transtema up for solid organic growth and margin improvements in 2025 – given that the installation-related businesses can improve somewhat during 2025, which we find reasonable due to falling interest rates and somewhat improving financials for most customers. We expect 15% organic growth and an EBITA margin of 5.3% in 2025. At SEK17.60 a share, Transtema is valued at 5.3x EBITA 2025e.

Following the new deal and increased forecasts for 2025 and beyond, we raise our Base Case to SEK29 (25).