Sitowise: Market recovery is yet to come

In our opinion, the market situation for Sitowise did not develop favorably in the first half of the year, which is why we lowered our forecasts before the Q2 results. 2024 is still expected to be a very challenging year for the Buildings business, and there is now more uncertainty about the performance of other businesses. As the market recovers and Sitowise's billing rates improve, there is a strong base for earnings growth, but given the forecast cuts, we believe expected returns remain weak in the near term. We lower our target price to EUR 2.90 (was EUR 3.20) and our recommendation to Reduce (previously Accumulate).

The market situation has not yet picked up significantly

The market situation in Sitowise's Buildings business has been weak for a long time, but an upturn is expected for the rest of the year. However, our current assessment is that the recovery in H2 will be weaker than previously expected and will weaken Sitowise's prospects in terms of both revenues and earnings. In addition, Infrastructure and Digital Solutions, which have grown strongly in the past, are facing stronger comparison figures now that the market has stabilized after growth in both areas. For Digital Solutions, we think the market is even a little bit challenging, especially on the private side. The slightly weaker market situation in Sweden combined with Sitowise's sales efforts and growth challenges are also currently weighing on billing rates.

Operational forecasts down by around 10%

Due to the continued market weakness, we have slightly reduced our revenue forecasts. Taking into account Sitowise's business model and the cost cutting measures already implemented, our EBIT forecasts have been reduced by approximately 10%. In 2024, Sitowise expects a slight decrease in revenue (2023: 211 MEUR) and an adjusted EBITA margin at or above the 2023 level (2023: 8.1%). Our updated estimates expect revenue to decrease by 5% to 201 MEUR and adjusted EBITA to decrease to 15 MEUR (2023: 17 MEUR). We forecast the margin to fall to 7.5%, below the guidance. We believe the risk of lowering guidance is increased if the market does not show signs of a rapid recovery. As the market eventually turns and billing rates rise, we expect earnings levels to improve in 2025-26. We estimate that current profitability is below Sitowise's potential profit level (EBITA%: +10%) but reaching this level will require success in Sweden and stronger traction in the Finnish market. Risks to the improvement include continued market weakness, growth challenges in the businesses, failure to integrate acquisitions and continued intense competition.

Potential waiting to be realized

Sitowise's valuation in 2024 rises to a challenging level due to its weak earnings performance, especially relative to net income (EV/EBITDA: 8x, P/E: 20x). If the profitability turnaround and market recovery materialize, the multiples for the coming years will come down (2025e: EV/EBITDA: 7x, P/E: 11x), reflecting the company's potential. However, uncertainty about the pace of the market recovery keeps forecast risks elevated, and longer-term odds cannot be fully relied upon. Based on 2024-2025 forecasts and the midpoint of our valuation range (EV/EBITDA: 7x, P/E: 14x), the stock would have little to no upside. Even the dividend yield does not support the expected return in the short term. Sitowise is trading at a small discount to its peers (10%), but this does not signal significant upside either. The DCF is higher than the share price (EUR 3.9), but the current lack of earnings growth and weak market performance undermine its relevance.