Wärtsilä: Speed bumps coming up

Translation: Original published in Finnish on 10/11/2024 at 8:25 am EEST.

Wärtsilä currently has a number of revenue and earnings drivers pointing in different directions, the impact of which we have now updated in our forecasts. The net effect is positive from 2025 onwards, but the changes are not large. However, the stock is fully priced, and we therefore maintain a Reduce recommendation. Nevertheless, we raise our target price to EUR 18.00 (was 17.00), following the changes in our forecasts for 2025-2026. 

Marine and Energy forecasts moving in different directions

The order outlook for the Marine business has improved further after Clarkson raised its forecast for global ship orders in 2024. In addition, growth will be strongest in segments where Wärtsilä has a high market share, namely cruise ships, ferries and offshore. We have therefore raised our Marine equipment order estimates for 2024-2026 by 14-23%. Due to the shipyards' very long lead times, the impact on our revenue forecasts for Marine is less pronounced (+2...+6%) and the strengthening of order intake will be reflected more in the growth of Marine's order book over our forecast period. Marine's sales mix for 2024-2026 and thus our margin estimates are virtually unchanged. Another key variable is Wärtsilä Energy's storage business, where the company has lost market share as battery raw material prices have fallen. The combination of these factors, together with the slowdown in the expected delivery rate of the order book, has led to a significant reduction in the revenue projections for the storage business for 2024-2025. Across the whole Energy business, our 2024 revenue forecast is down 12%, our 2025 forecast is down 4%, and our 2026 forecast is down 2%. The changes we have made partially offset each other in the Wärtsilä group revenue figures. The changes in our group EBIT estimates for 2024-2026 are also quite small (-3...+4%). 

High valuation and slowdown in growth drivers

Wärtsilä's strengths as a company remain unchanged: a comprehensive technology portfolio, a very strong market position in many segments, and highly profitable service operations. There are, however, some slowdowns ahead. The expected order intake in the Marine business will only be realized in the long term due to the lack of capacity in the shipyards. In addition, the lack of infrastructure for the storage and distribution of low- or zero-emission fuels, both in ports and inland, is holding back growth in Marine as well as Energy. These problems are slow to be resolved, and therefore the main growth driver for Wärtsilä's share between 2025 and 2026 appears to be the growth in order intake and, at the same time, the order book. For reasons beyond Wärtsilä's control, we expect the growth in deliveries, and thus profitability, to slow down significantly. Indeed, we believe that Wärtsilä's strong demand outlook has already been largely discounted by the current valuation level of the stock. Based on 2025 P/E- and EV/EBIT-based calculations, the total expected return on the stock is on average +8...+9%. This is in line with a required return of around 9%, indicating that the stock is fully priced. The share’s 2025 P/E and EV/EBIT ratios (21x and 14x) are 12...21% below the median of the peers. The discount is clear, but the peer group's valuation multiples are tough. Our cash flow model does not indicate upside potential for the share, but instead the price level is about 4% above the DCF value.