Sitowise Q2'24 flash comment: Challenging times continue

Translation: Original comment published in Finnish on 8/13/2024 at 9:22 am EEST.

Sitowise reported an unsurprising result on Tuesday, in line with preliminary data. The company's revenue decreased significantly due to the weaker market situation. Due to weak revenue, low utilization rates and the challenges in Sweden, the result was also significantly down year-on-year. The order book continued to decline during the quarter and the market outlook is not expected to improve significantly in the second half of the year. In addition to market weakness, the company's profitability is now suffering from operational challenges, and based on the report, no quick turnaround is expected.

Revenue down as previously communicated

In line with preliminary data, Sitowise's revenue decreased by 10% to 50.9 MEUR in Q2 (Q2'23: 56.5 MEUR), continuing the downward trend that started last year. Acquisitions and one more working day in the quarter had a positive impact on revenue, and organic revenue was down by as much as 13% in the quarter. The decline in revenue was due to insufficient order books in Sweden, which led to weaker-than-expected performance. In addition, the Buildings market in Finland continued to be weak. The order book was down 7.5% year-on-year during the quarter at around 162 MEUR, reflecting the still weaker outlook, especially for the housing market in Finland and Sweden.

Profitability fell to very low levels

In line with preliminary data, Sitowise's adjusted EBITA decreased to 2.6 MEUR in Q2, thus weakening the margin to 5.0% (Q2’23: 8.0%). Profitability is very low as the performance was supported by one working day more than in the comparison period, which should normally support the company's result and revenue by about 0.8 MEUR. The poor profitability is due to Sweden and the project overruns, a weak market and the absence of the possibility of temporary layoffs in the unit. The weakness of the Finnish housing market and insufficient workload also weakened the company's utilization rate, which ultimately fell to 73.6% in Q2 (Q2’23: 76.0%).

Second half outlook challenging

In its recently updated guidance, Sitowise expects revenue to decline in 2024 (2023: 211 MEUR) and the adjusted EBITA margin (%) to be lower than in 2023 (2023: 8.1%). Regarding the market outlook, H2 is still expected to be challenging for almost all businesses, but especially for Sweden and Buildings. Market weakness is a challenge in itself, but of greater concern are the current dwindling profitability and operational challenges. The company is seeking to remedy this situation through the "Building for future" program, the main objective of which is to adapt the Swedish and Buildings businesses to today's market opportunities. The company will also continue to optimize and streamline its organization and focus on sales and growing business areas. The actions have now been accentuated, but they seem to be similar to Sitowise's previous actions. We expect to see a clearer impact in 2025, but a bigger improvement in result will also require help from the market.

Financial situation getting interesting

Operating cash flow decreased to 5.9 MEUR in Q2 (Q2'23: 9.6 MEUR) with the poor result. The weak result and cash flow were also reflected in the company's financial indicators. Sitowise's solvency ratios are at a reasonably good level (Q2 equity ratio: 44%, gearing ratio %: 47), but debt leverage (net debt/adjusted EBITDA) was already at 4.3x in Q2 (target below 2.5x). The figure is high and already raises concerns about the company's covenants. In the company's 100 MEUR financing agreement, net debt/EBITDA is one of the covenants, and the company reported that it had negotiated a temporary adjustment of the loan covenants with the financiers during the reporting period. However, we believe that the covenants cannot be stretched indefinitely and that the company's result will also need to turn around in order for the financial figures to improve.