Sitowise’s Q1 results were mixed, with revenue in line with expectations but underlying profitability slightly below. In our view, the still weak profitability reflects the criticality of revenue growth, which is also a necessity for strengthening cash flow and thus the financial position. Relative to the low near-term earnings level, the valuation of the stock is elevated, which together with the financial position constitutes a weak risk/reward ratio in our view. Therefore, we reiterate our Reduce recommendation and revise our target price to EUR 2.40 (previously EUR 2.50), mainly due to lower estimates.

Operational performance in Q1 broadly in line

Sitowise’s revenue decreased by 6.6% to 48.1 MEUR in Q1, which was well in line with our expectations. The declining revenue was mainly driven by continued weakness in the Swedish market (-28% y/y) and soft conditions in the Buildings segment (-12%). Infra performed solidly (+3.9%) and Digital Solutions exceeded expectations (+6.7%).

Adjusted EBITA declined to 2.4 MEUR (Q1’24: 3.4 MEUR), with the margin falling to 5.1% (Q1’24: 6.6%) due to lower volumes and price pressure. However, when adjusting for the negative calendar effect, underlying profitability was broadly in line with the prior year and improved in the Finnish operations as a result of previously implemented efficiency measures. In contrast, the Swedish business remained unprofitable. Order intake increased across all segments (+8.2% y/y), and the order book rose 4% quarter-to-quarter to 157 MEUR, pointing to signs of a recovery.

Estimates slightly revised, market recovery still awaits

Although Sitowise refrained from issuing guidance due to ongoing uncertainty in the construction market, we believe that the management’s tone in the Q1 report was slightly more confident than in Q4. The company noted that the Finnish construction market may have bottomed out and showed signs of moderate recovery, though the company maintained the view that the broader recovery will be slow and materialize gradually in the second half of 2025. Visibility in Sweden remains low, and a meaningful recovery is expected only in late 2025 or even 2026.

While we believe management’s commentary indicates slightly improved visibility into a gradual market recovery, particularly in Finland, this aligns with our existing expectations. Therefore, we have made only minor refinements to our operating forecasts following the report. We expect revenue to decline by 1% in 2024, with organic growth resuming in H2’25 as the order book strengthens and utilization rates improve. Profitability in 2025 will remain under pressure from a weak market, tight pricing, and low utilization. However, restructuring efforts are expected to start contributing from Q2 onwards. We expect operational leverage to support margin improvement from 2025, with growth accelerating further in 2026 (forecast: +9% revenue growth), supported by improving construction and investment activity, easing price competition, and higher efficiency. In our view, a return to high-single-digit EBITA margins will require sustained revenue growth, especially in Sweden, where profitability remains the key challenge.

We wait for a better risk/reward

With our 2025-2026 estimates, EV/EBITDA ratios are 9x and 6x, which are reasonable. However, high net financial expenses significantly erode earnings (and cash flow), resulting in P/E ratios of 33x and 13x for the respective years. Thus, the earnings-based valuation is high as a whole. Relative valuation and DCF paint a similar picture. Together with the high leverage caused by the weakened profitability (2025e net debt/EBITDA 4.0x), we believe the risk/reward ratio is weak, even though the company's earnings potential is, in our view, higher than the short-term development.