Talenom Q3'24: The new strategy did not convince the market

Translation: Original published in Finnish on 11/1/2024 at 8:05 am EET

We reiterate our Accumulate recommendation for Talenom and revise our target price to EUR 5.2 (was EUR 5.3). The company’s Q3 result was better than we predicted, as Finland’s excellent profitability covered the lousiness of Sweden. In Sweden, the ‘backstop’ is leaking and the situation is worrying, but the greatest pain may already be over. In the updated strategy, the company focuses its operations on accounting services and software to be separated, while smaller by-products are given to partners. Talenom definitely needs focus after the confusing recent years. Although Sweden’s development is unconvincing, we believe that share valuation is unjustifiably low.

In Finland, profitability was excellent, but Sweden is a mess

Talenom generated a very strong result in Q3 in Finland despite revenue declining in a weak market situation. In Sweden, the figures were weak across the board: revenue decreased by about 10% and the EBITDA margin was 10% in the red. The main reason for the miserable development is probably the significant change phase, which 'caused personnel and customer drain'. The depth of the problems is difficult to assess, but about 40% of the customer base has now been transferred to own software, so the worst pain may soon be over. However, the management has a lot of work ahead to quickly stabilize the situation in Sweden. In Spain, on the other hand, key figures developed largely well as expected, and the gradual progress approach seems to be working. In total, Talenom’s Q3 EBIT (3.0 MEUR) exceeded our expectations (2.0 MEUR). However, the overshoot was mainly (0.9 MEUR) due to the downward reassessment of additional purchase prices of previous acquisitions, which is not actual operating income.

Next year’s growth expectations declined further

As expected, Talenom reiterated the guidance given in the profit warning and the weak result for 2024 is already largely known. Finland’s operations will continue to develop steadily in 2025, and some growth is also likely toward the end of the year as the markets recover. In Sweden, however, Talenom will probably have to focus on fixing the leaking business base and profitability, which is why we cut our organic growth estimate close to zero. Talenom now expects benefits from the introduction of its proprietary software in H2’25. In Spain, Talenom's recipe seems to be working and the company is making progress, but the slope of growth is unclear. Overall, 2025 earnings forecasts fell by around 10%, mainly with Sweden. In Finland, our estimates actually increased due to the record-breaking profitability of Q3. We note that our forecasts still do not expect external revenue from the software business that will be separated. With current data, predicting this would be speculation, and we expect more information from the company before making separate forecasts.

Valuation no longer gives hope to international business

Talenom’s enterprise value is now some 250 MEUR, which we believe is equivalent to the fair value of the Finnish business (2025e EV/EBIT 13-14x). The Swedish, Spanish and Italian businesses thus come as a ’freebie' or the market estimates their value to be negative. Although our confidence in Sweden is shaken, the situation is still not very different from Talenom’s difficulties in introducing the 'accounting production line' in Finland back in the day. When things finally started rolling in Finland after the start of the stock market journey, the performance was convincing. Thus, we are happy to take on Sweden and Spain as free options. If you look for something positive in Talenom's problems, they force the company to refocus on its strengths. We welcome this after the experiments of recent years.