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Pihlajalinna - Earnings accretion set to continue

Pihlajalinna releases Q3 results on Nov 4. Our estimates remain intact for now. We continue to see good upside potential due to earnings growth and multiple expansion.

Solid Q2 gains represented a minor earnings beat

Pihlajalinna’s Q2 figures were pretty much in line with estimates. Top line grew 24% y/y from a soft comparison period. Private customer volumes recovered but remained below pre-pandemic levels. Private revenue fell 18% in FY ’20, but corporate and public sector revenues held up. Q2’20 was nonetheless a bit soft for the two as well and thus the corporate and public sector groups were able to post respective 31% and 18% y/y growth rates in Q2’21. The Q3 comparison base is higher but we still expect 10% y/y growth. Q2 profitability improved by some EUR 6m y/y and was a bit better than estimated. Q3 is seasonally the most profitable quarter due to low public sector costs and our EUR 10.6m EBIT estimate is ahead of the EUR 9.0m consensus.

EBIT potential to materialize in the short and long term

Covid-19 services added EUR 8.1m in Q2 revenue and the Q3 level should remain high (with some cost uncertainty), yet it will be of interest to hear to what extent Pihlajalinna expects the level to decline from Q4 onwards as the Finnish vaccination rate reaches 80%. The fading will cause its own top line headwind but the private volume normalization as well as the public side handling of queues, further stretched by the pandemic, should compensate. There’s more profitability potential going forward even with current volume levels. We reckon the Pohjola Hospital acquisition advances pretty much as planned, and thus should be completed by the end of the year or early next year at the latest. We have already added the EUR 60m revenue target to our FY ’22 estimates. The smallish target has been loss-making, but Pihlajalinna seemed confident with respect to achieving rapid results. We hence expect earnings accretion for next year as well.

Current valuation is by no means challenging

Pihlajalinna hasn’t completed significant acquisitions for a while; we estimate 13% growth for FY ’21. We see FY ’21 EBIT at EUR 31.9m and on this basis the multiples stand at ca. 8x EV/EBITDA and 16x EV/EBIT. Both profitability estimates and multiples remain well below those of peers: we continue to consider valuation attractive. We retain our EUR 13.5 TP and BUY rating.

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