Solteq - Profit turnaround holds in tough market
Solteq‘s profitability continued to improve y/y, while comparable revenue declined. The actions to improve profitability are bearing fruit, while market conditions are further delaying growth
Profitability turnaround continues, sales remain a concern
Solteq’s comparable revenue declined by 6.5% y/y to EUR 11.2m (Evli: EUR 12.4m), while the company's profitability turnaround accelerated, with adj. EBIT improving significantly to EUR 0.6m (Q3’23: EUR -0.7m, Evli: EUR 0.9m). Solteq had lowered its comparable net sales guidance before the earnings release, so the shortfall in net sales was largely anticipated, though the extent of the decline was somewhat disappointing when compared to H1 figures. The improvement in adj. EBIT was mainly driven by cost saving initiatives. In the Retail & Commerce segment, revenue declined to EUR 8.5m (Evli: EUR 9.3m), while adj. EBIT reached EUR 0.7m (Q3’23: EUR 0.3m, Evli: EUR 0.8m). The increase in relative profitability (adj. EBIT-margin of 8.5% vs. Q3’23: 2.8%) was surprisingly strong, given the lower net sales. The Utilities segment saw a slight revenue decline to EUR 2.9m (Evli: EUR 3.1m), with adj. EBIT at EUR -0.1m (Q2’23: EUR -1.1m, Evli: EUR 0.1m). The profitability enhancement was fueled by efforts to improve product quality and operational efficiency.
Sales growth delayed until 2025
While the continued profitability improvement in Q3 was favourable, the downward trend in net sales remains a concern. The long-awaited recovery in customer demand is still yet to materialize and particularly affected the Retail & Commerce segment in Q3, with postponed decision-making on several key customer acquisition opportunities. Q3 has proven challenging for the Finnish IT services sector, highlighted by profit warnings and weak revenue development among several companies in the industry. Given the ongoing market difficulties and Solteq’s lowered revenue guidance, we have adjusted our 2024 net sales estimates downward by 3.9%. We now expect 2024 net sales to reach EUR 52.3m, which is expected to pressure profit margins and therefore we lower our EBIT estimate for 2024 to EUR 1.4m (prev. EUR 2.1m).
BUY with a target price of EUR 0.75
Despite slight reductions in estimates, the ongoing profitability turnaround and an eventual rebound in overall IT spending (though timing uncertain) support our optimism at current valuation levels. We retain our TP of EUR 0.75 and BUY rating.