Transtema: Rebound in Margins
Research Update
2024-02-09
06:45
Redeye maintains its positive view of Transtema following a Q4 showing a better q/q margin improvement than expected. Although Q1 2024 likely will be soft due to adverse weather, reduced costs, new deals, and a somewhat improving market, set Transtema for gradual improvements of margins and organic growth rates in 2024.
FN
RJ
Fredrik Nilsson
Rasmus Jacobsson
Contents
Improving Margins q/q Beating Our Forecast
Financial Forecasts
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article
Sales was SEK726m (772) and came in 3% below our forecast of SEK749m. Organic growth was negative 16%, while our forecast was -12 %. The closure of the copper network impacted Sweden, while both Sweden and Norway saw lower demand in general. EBITA was SEK41m (58) Our forecast was SEK 33m. The adjusted EBITA margin increased q/q to 5.6%, compared to 3.5% in Q3 2023, and beat our forecast of 4.4%. Although Q4 is a seasonally strong quarter, due to the cycles of the installation business, the significant uptick indicates that Transtema’s cost savings are paying off.
While we believe Q4 was a clear step in the right direction, 2024 has started with adverse weather in Norway and Sweden, affecting the installation business and likely negatively impacting sales and margins in Q1. Also, some of Transtema’s businesses were negatively affected for ten days by the IT attack against TietoEVRY. While the attack likely will cost Transtema a few SEKm, management points out that the organization handled the situation well and that all critical service orders were on time. However, after a presumable soft Q1, we believe 2024 will see improved y/y margins and organic growth rates. We believe that organic growth is about to bottom out. Our best guess is that it either did in Q4 or will in Q1. Although price pressure is a risk, an improving market is a basis for growth, and Transtema has been taking initiatives regarding its sales efforts.
Based on the estimated revisions, we increased our Base Case from SEK26 to SEK29. We leave our sales forecast for 2024 and 2025 roughly flat and increase our EBITA forecast by 3% for both years. The strong q/q margin improvement makes us more confident that Transtema are moving in the right direction. Despite, in our view, a relatively solid Q4 report and several interesting deals since then, the share is still trading close to November 2023 lows and far below our SEK29 Base Case. Transtema is trading at 6.2x and 5.3x on our EBITA forecasts for 2024 and 2025, respectively, versus peer medians 8.8x and 8.2x.
SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
Revenues | 2,457.4 | 2,688.6 | 2,501.4 | 2,601.4 | 2,705.5 |
Revenue Growth | 45.4% | 9.4% | -7.0% | 4.0% | 4.0% |
EBITDA | 257.5 | 191.0 | 219.3 | 158.1 | 172.5 |
EBIT | 154.5 | 58.5 | 98.8 | 111.3 | 128.8 |
EBIT Margin | 6.3% | 2.2% | 4.0% | 4.3% | 4.8% |
Net Income | 117.9 | 139.6 | 45.9 | 55.6 | 69.3 |
EV/Sales | 0.5 | 0.3 | 0.3 | 0.2 | 0.2 |
EV/EBIT | 7.9 | 11.6 | 6.6 | 5.6 | 4.3 |
Sales was SEK726m (772) and came in 3% below our forecast of SEK749m. Organic growth was negative 16%, while our forecast was -12 %. Sales in Sweden was -17% organically due to the liquidation of copper networks and a lower overall demand. Sales in Norway was -12% organically due to lower overall demand. The total organic decline in sales is like the level seen in Q3. As stated in previous Updates, the negative organic growth is not a result of Transtema losing deals but rather due to the company's inability to fully compensate for the decline in copper – which has accelerated in 2023 – as Transtema did well in 2022. While Transtema during Q4, as mentioned in our preview, closed several deals with large potential, there is typically a few quarters lag from signing to revenue.
The positive signs, with more procurements, management saw by the end of Q3 continued in Q4, which of some Transtema has won. There are several ongoing dialogues regarding pan-Nordic deals, where Transtema, with its presence in Sweden and Norway and partners in Denmark and Finland, believes it has a strong position as major telcos are aiming to decrease the number of suppliers. At the same time, the company notices some competitors competing with low prices. While competing with price probably would support growth in the 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 despite hurting sales in the short term.
All in all, we believe that organic growth is about to bottom out. Our best guess is that it either did in Q4 or will in Q1 (partly due to adverse weather). Although price pressure is a risk, an improving market is a basis for growth, and Transtema has been taking initiatives regarding its sales efforts. One example is additional services outside the traditional telecom arena, such as maintenance of passive equipment in facilities and battery storage, besides the already notable EV-charging initiative. While we expect negative organic growth in 2024 as well, we expect gradual improvements during the year.
EBITA was SEK41m (58). Our forecast was SEK 33m. The adjusted EBITA margin increased q/q to 5.6%, compared to 3.5% in Q3 2023, and beat our forecast of 4.4%. Although Q4 is a seasonally strong quarter, due to the cycles of the installation business, the significant uptick indicates that Transtema’s cost savings are paying off.
While we believe Q4 was a clear step in the right direction, 2024 has started with adverse weather in Norway and Sweden, affecting the installation business and likely negatively impacting sales and margins in Q1. Also, some of Transtema’s businesses were negatively affected for ten days by the IT attack against TietoEVRY. While the attack likely will cost Transtema a few SEKm, management points out that the organization handled the situation well and that all critical service orders were on time. However, after a presumable soft Q1, we believe 2024 will show improved y/y margins and organic growth rates.
We leave our sales forecast for 2024 and 2025 roughly flat and increase our EBITA forecast by 3% for both years. While we believe investors should expect a soft Q1 2024, the recently 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.
At the same time, we raise our long-term margin assumptions somewhat. However, our 5.5% long-term EBITA margin forecast remains below the company’s target of 7%, implying the potential for additional increases if Transtema progresses further towards the target. As stated explicitly in the Q4 report, Transtema’s financial targets remain unchanged for the mid-term.
Based on the estimate revisions, we increase our Base Case from SEK26 to SEK29. The strong q/q margin improvement makes us more confident that Transtema is moving in the right direction – although Q1 2024 is likely to be soft.
Despite, in our view, a relatively solid Q4 report and several interesting deals since then, the share is still trading close to November 2023 lows and far below our SEK29 Base Case. Transtema is trading at 6.2x and 5.1x on our EBITA forecasts for 2024 and 2025, respectively.
Transtema is trading at a discount to peers for 2024-25e on EV/EBIT and EV/Sales. 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.
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.
Disclosures and disclaimers
Contents
Improving Margins q/q Beating Our Forecast
Financial Forecasts
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article