Translation: Original published in Finnish on 2/13/2025 at 7:28 am EET.

We lower Sitowise's target price to EUR 2.50 (was EUR 2.70), reiterating our Reduce recommendation after the company’s Q4 result. For Sitowise, 2024 was well below expectations and the outlook for 2025 is for another weak year in terms of results. The profitability challenges in the Buildings and Swedish businesses will continue for the time being, and a turnaround will require not only improved operational performance but also market traction. Given the risks to the business and the uncertain turnaround, we do not see the stock's risk/reward ratio as attractive now.

Poor result in the last quarter of the year

Sitowise's revenue decreased by 8% to 48.8 MEUR in Q4 (Q4'23: 52.8 MEUR), thus declining already for the sixth consecutive quarter. One of the reasons for the expected revenue decline in the quarter was the timing of the Christmas break at an unfavorable time for the employer, but operationally the decline was more influenced by insufficient order books in the Swedish and Buildings businesses and weak market conditions. The order book was still down 8% in the quarter and so far there is little scope for a turnaround in revenue growth. Growth would be needed, as Sitowise's profitability fell significantly below expectations. Adjusted EBITA decreased to 1.2 MEUR in Q4 and the margin weakened to 2.5% (Q4’23: 4.5%). Given the weak comparison period, the quarterly result was dismal and adj. EBITA missed our estimate by 65% (estimate: 3.5 MEUR) and margin by several percent (estimate: 7.0%). The weak profitability and forecast miss were caused by reduced utilization rate due to the timing of Christmas and the weak situation in the housing market, but also by the project challenges that re-emerged in the quarter. The project challenges seem to be more of a market-driven nature according to the breakdown in Sitowise's earnings call, but their recurrence from quarter to quarter raises concerns about the health of Sitowise's businesses (especially in Sweden).

Lack of guidance increases uncertainty

In addition to the poor result, Sitowise chose not to provide guidance for 2025. According to Sitowise, the timing of the construction market recovery is uncertain, making it impossible to reliably estimate revenue. The lack of guidance is a negative in our view, and with the results coming in below expectations, it raises concerns about Sitowise's direction, or lack thereof. Indeed, the lack of guidance and the challenging outlook have significantly lowered our estimates for the coming years.

Based on the outlook, we expect Sitowise's growth to start only from 2026 (+9%) and to continue also in 2027 (+7%). As volumes and billing rates increase, profitability will rise to levels closer to 9% (EBITA-%), up from around 5% last year. This is also closer to the normalized level of Sitowise (9-10%). Despite good EBITA growth, high and still rising 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 further inflationary pressures (wages).

Valuation challenging in the coming years, but there is potential

Sitowise's valuation for the current year is challenging due to the weak result and we therefore emphasize the more normalized earnings level for 2026 in our valuation. In 2026, the valuation will indeed decline due to earnings growth (2026e avg.: EV/EBITDA: 6x, P/E: 12x) but will still only be at a neutral level. Based on next year and our accepted valuation level (EV/EBITDA: 7x, P/E: 12x), the stock would have little upside, and the dividend does not support the expected return now. The DCF calculation is higher than the share price (EUR 3.3), 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.