Talenom Q4'24: Deadweight in Sweden

Translation: Original published in Finnish on 1/22/2025 at 8:10 am EET.

We reiterate our Buy recommendation but lower our target price to EUR 4.6 (previously EUR 5.2) on the back of forecast cuts. Talenom's Q4 results fell well short of our expectations, especially with weak December sales, which capped off a miserable 2024 for the company. There were no surprises in the outlook, but the recovery is starting from a deeper hole than expected, especially in Sweden. Weak Q4 results sent the stock price tumbling, but we expect the valuation to gradually rise as the company's performance improves. 

A lousy end to a bad year

In Q4, Talenom’s revenue totaled 29.2 MEUR, down -1.7% year-on-year. Revenue was below our forecast (29.9 MEUR), in particular due to lackluster December billing. In general, the market situation in Finland and Sweden remains very challenging, as part of the customer base in both countries is experiencing severe difficulties, leading to both price pressure (volume reductions) and churn (bankruptcies). The group-level EBIT for the seasonally weakest period was a poor 0.1 MEUR, compared to our forecast of 1.4 MEUR. The result was unexpectedly weakened by one-off expenses (change negotiations), which the company had previously estimated at 0.3 MEUR and which increased to 0.5 MEUR. However, this is no excuse as the company received 0.4 MEUR from the sale of its debt collection business.

In Finland, developments were largely in line with our expectations and the company achieved excellent profitability despite a slight top-line decline. In Sweden, however, the decline in revenue deepened to 15% (Q3'24: -10%) and the cost structure was burdened by software implementation costs, resulting in an operating loss of 1.7 MEUR (forecast: -1.2 MEUR). In Spain, Q4 was also much weaker than we had expected, but this is probably largely explained by the seasonal nature of the business, which we are seeing for the first time. Earnings per share were zero in Q4 and will be only EUR 0.13 in 2024, but the dividend can still rise to EUR 0.20 (the latter of the two tranches is discretionary). This would further leverage the balance sheet and increase the risk profile.

No change in the outlook, but misery continues in Sweden

On December 13, 2024, Talenom guided for 2025 revenue of around 130-140 MEUR and EBITDA of around 36-42 MEUR, and now the outlook has only been further supported. In Finland, revenue is starting to pick up slightly thanks to record new wins, which is also supporting profitability. In Sweden, the struggle will continue with a significantly lower cost structure after the company adjusted staffing levels to demand. Productivity will improve as the year progresses, as proprietary software and processes provide benefits beyond cost and revenue, but this is little consolation as revenue declines. The key at this stage is to maintain the foundation as the market turns in the coming years and to ensure a broad user base for the software. In Spain, organic growth prospects are good (potentially above 10%) and further growth will come from acquisitions, which will also contribute to earnings. For 2025, we now expect revenue of 131 MEUR and EBITDA of 38.5 MEUR, both down a few percent. However, the earnings lever is very strong for the lower rows of the P&L, which is why we have slashed our 2025 earnings forecasts by 10-15%.

Valuation rises with performance

Talenom is a cheap stock if you believe that the international business will eventually become profitable. In Sweden, the situation is difficult, but we are increasingly confident in Spain's potential. The stock's 2025e P/E is 21x and EV/EBIT 18x, which we find attractive given the company's "international development stage". Excluding foreign operating losses alone, the multiples would be 16x and 15x, respectively, which could be justified by Finland's earnings growth prospects in the current recession. So international business doesn't have to be a success story at the current pace, but it does have to move forward.