Solteq - New challenges met

New challenges from Solteq Digital
Solteq reported Q3 results below our already rather low expectations. Net sales declined 3.7% y/y to EUR 14.4m (Evli EUR 14.7m). The operating profit and adj. operating profit amounted to EUR -5.0m and -0.5m respectively (EUR 1.1m/1.2m in Q3/21), below our estimates (Evli EUR -4.1m/0.3m). Solteq Software’s EBIT was negative as expected while the modest growth was a positive. Solteq Digital unexpectedly showed a rather notable 9.6% y/y growth decline and profitability as a result was also on the weaker side. Problems appear to relate market demand and some delays and hesitation in customer activity.

Near-term outlook not the best
With the added woes of Solteq Digital, the near-term for Solteq looks rather challenging. Fortunately, Solteq Software showed some signs of the product development related challenges being alleviated and customer demand remains healthy. Nonetheless, with the problems being more fundamental in nature a clear recovery appears more likely to materialize during H1/2023. The market sentiment driven challenges in Solteq Digital are quite worrisome, with the segment having been the main driver of profitability. The challenges are likely to continue to some extent going forward as customers review investment needs, but a larger deterioration still appears unlikely supported by necessity-based investments. With the challenges, our expectations for 2023 remain on the softer side. Visibility is also subdued by the market environment and the pace at which Solteq Software, with the key Utilities business, is able to ramp-up growth again.

HOLD with a target price of EUR 1.2 (1.5)
With the added concerns and reduced visibility near-term upside remains somewhat limited although Solteq still exhibits significant and proven potential. On our estimates valuation upside relies on mid-term potential or significant improvements next year. We lower our TP to EUR 1.2 (1.5), HOLD-rating intact.