Sitowise’s Q2 results were mixed, with revenue in line with expectations but disappointing profitability. A slow recovery remains the prevailing outlook, as indicated by management commentary and market indicators. Consequently, we continue to view the risk/reward ratio as unattractive, stemming from the combination of weak earnings, high leverage, and persistent market uncertainty. As a result, we reiterate our Reduce recommendation and revise our target price to EUR 2.30 per share (was EUR 2.40 per share).

Revenue in line but earnings missed our expectations

Sitowise’s Q2 revenue of 49.8 MEUR (-2.1% y/y, organically -1.2%) was broadly in line with expectations. Weakness persisted in the Swedish (-16.9% y/y) and Buildings (-9.3% y/y) business areas due to tough market conditions. Conversely, Infra and Digital Solutions outperformed, growing organically by approximately 8%. Adjusted EBITA declined to 2.5 MEUR (Q2'24: 2.6 MEUR), falling below our estimates. While Infra maintained strong profitability, Buildings and Digital Solutions were below target, and the Swedish business remained unprofitable. Due to a decline in the rolling 12-month EBITDA, the net debt/EBITDA ratio rose to 5.9x (from 4.3x). While this level of leverage is elevated, the company's financing agreement, with maturity until June 12, 2027, provides a buffer. This gives Sitowise time to focus on improving its profitability. Given that the absolute net debt itself is not excessively high, strengthening the company's earnings base is the primary challenge and key to deleveraging.

Estimates revised; market recovery still awaits

Sitowise again refrained from providing guidance due to persistent market uncertainty, with management commentary largely reiterating previous statements. The company noted early signs of a moderate recovery in the Finnish construction market, which has potentially bottomed out. However, this recovery is expected to be slow and gradual, with new residential construction not expected to recover until 2026. The outlook for the Swedish market remains subdued, with a recovery anticipated only in late 2025 or 2026.

While this outlook was largely in line with our expectations, we have lowered our earnings estimates for the current year following the weaker-than-expected Q2 order intake and profitability. We now estimate a 2% decline in Sitowise’s revenue for the full year, with an adjusted EBITA margin of around 5%. We believe that without sales growth, it will be challenging for the company to substantially improve profitability, although restructuring efforts are expected to provide some support.

We have also revised our longer-term estimates downward, as the recovery has been more prolonged than we previously anticipated. We now expect a clearer rebound to emerge only in 2026, with growth accelerating to 6% and 7% in 2027, as construction and investment activity picks up and price competition eases. We expect operational leverage to support margin improvement, targeting near-normal earnings levels from 2027.

We continue to stay on the sidelines

With our 2025-2026 estimates, EV/EBITDA ratios are 12x and 8x, which are reasonable. However, high net financing expenses significantly erode earnings (and cash flow), resulting in high P/E ratios. In our view, the absolute valuation multiples are high as a whole, and the DCF as well as the relative valuation paints a similar picture. Together with the high leverage caused by the weakened profitability (2025e net debt/EBITDA 5.5x), 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.