Translation: Original published in Finnish on 1/24/2025 at 6:00 am EET.

We reiterate our Reduce recommendation for Sitowise and revise our target price to EUR 2.70 (was EUR 2.50) in connection with updating our extensive report. Sitowise, which focuses on technical consulting and the digitalization of buildings and infrastructure, has been significantly affected by the weakness of the construction market in recent years. The industry's best profitability has melted away with low billable work, rising costs and the challenges of international growth. As the market recovers, the earnings lever also works upwards, but there is a risk that profitability challenges will persist for longer than expected. The valuation is challenging for the coming years and, in our view, does not adequately reflect the risks. 

Expert house on the built environment

Sitowise is a Finnish specialist company focused on technical consulting and design of the built environment and its digital solutions. In 2023, roughly 86% of Sitowise's business was generated from technical consulting in the Buildings and Infra markets and around 14% from Digital Solutions. Founded at the end of 2017, Sitowise has grown at around 11% per year until 2023 (2018-23). Over the same period, profitability has been around 10.8% (adj. EBITA %), which has been among the best in the industry. In recent years, however, profitability has declined due to weaker demand in the residential construction market impacting the company's utilization rates, growth challenges related to the expansion into Sweden, a generally weaker market, and increased costs (wage and IT cost inflation).

Sitowise is working to return profitability to the better side of 12%, but we believe this will require a very attractive market and addressing internal challenges. The market is unlikely to return to its 2020-21 levels in the next few years, especially in the housing market, on which Sitowise is surprisingly dependent. The company's target of more than 10% annual growth (including acquisitions) is now being challenged by a difficult market and a weak economy. The company's net debt/adj. EBITDA is currently around 5x (Q3'24) and there is no room for inorganic growth. A pick-up in earnings and a recovery in cash flow in the coming years will therefore also be important for improving the company's financial situation and for renegotiating the financing due in 2026.

Earnings lever in place when the market pulls back

Over the next few years, we expect a clear recovery in the market. We still expect early 2025 to be a challenging year, but our H2 forecasts show signs of a gradual recovery. However, we expect Sitowise's growth to pick up in the coming years only from 2026 (+9%) and to continue in 2027 (+7%). As volumes and billing rates increase, profitability will rise to levels closer to 9% (EBITA%), up from around 6% (2024e) last year. This is also closer to the normalized level of Sitowise (9-10%). Despite good EBITA growth, high financing costs will eat up a large portion of net income in the coming years. The main risks to our forecasts are a delay in the market turnaround, continued internal challenges at Sitowise and rising inflationary pressures.

Valuation challenging in the coming years, but there is potential

In view of the expected earnings turnaround, the valuation for the next few years (2025-26e avg.: EV/EBITDA: 8x, P/E: 17x) is not attractive. Based on the outlook for the next few years and our accepted valuation level (EV/EBITDA: 7x, P/E: 12x), the stock would have downside potential. In 2026, earnings will be closer to normalized levels, which is why we weigh them more heavily than this year's valuation. The dividend yield does not support the expected return in the short term, as we do not expect dividends for 2024. The DCF calculation is higher than the share price (EUR 3.4), reflecting the longer-term potential, but in the short term we believe the upside is limited by the risks in the market, the company's performance and its financial situation.