Tecnotree Q3'24: Risk level remains high

Translation: Original published in Finnish on 10/28/2024 at 7:50 am EET.

Tecnotree's Q3 results were well below our forecasts, with a sharp decline in revenue and earnings. Cash flow improved as expected in the first half, but further evidence of an improvement in the sustainable cash flow profile remains to be seen. Given the cash flow challenges and governance shortcomings, we continue to recommend that investors stay on the sidelines, at least for now, given the very high risk profile. We reiterate our Sell recommendation and EUR 3.0 target price. 

Q3 results missed our forecasts - cash flow slightly improved as expected

Tecnotree's Q3 revenue decreased by 11% to 19.0 MEUR, compared to our expectations of moderate growth (forecast around 4%). We believe that the decrease was influenced by the low order intake in the beginning of the year, but there was an upturn in orders in Q3 (23.8 MEUR). On a quarterly basis, the order book returned to growth (+3%) but was still down year-on-year (-4%). The risks associated with the growth outlook have increased to some extent. Tecnotree’s EBIT landed at 5.0 MEUR in Q3, which was also significantly below our forecast (7.8 MEUR). The miss was largely due to lower-than-expected revenue, with no major surprises on the expense side. As expected, free cash flow improved compared to the first half of the year and amounted to 1.7 MEUR, mainly due to the release of working capital and lower investments. The H2 cash flow guidance also points to positive free cash flow in Q4, but we await further evidence of sustainable cash flow improvement.

Significant currency fluctuations make interpretation of guidance difficult

Tecnotree reiterated its guidance for the current year of 2-7% revenue growth and 7-15% EBIT growth. Due to Tecnotree's significant FX exposure, the absolute revenue and profit figures differ significantly from the figures presented in constant currency. Absolute revenue was down 4% in the first nine months, but up 11% at constant exchange rates. Adjusted EBIT decreased by 1% in absolute terms but increased by 28% at constant exchange rates. As a result, the company could even raise its guidance for the rest of the year, even though the absolute numbers are moving in the wrong direction. We expect Tecnotree's revenue to decline by 1% this year to 77.4 MEUR and adjusted EBIT to decline to 22.8 MEUR (reported EBIT expected to be 19.9 MEUR).

Our advice is to remain on the sidelines

In our opinion, determining the fair value of Tecnotree is very challenging in the current environment. We do not believe that cheap-looking earnings-based multiples can be relied upon, and visibility on the company's sustainable cash flow generation capacity is weak. Around the lower end of next year's cash flow guidance, the cash flow yield would be in the single digits, which we find unattractive given Tecnotree's risk level. The valuation should also take into account the dilution caused by the company's convertible bonds and the staff incentive plan in the coming years (combined effect of almost 50% at the current share price). In our view, the risk level of the company's business is high, and the company's communication and corporate governance deficiencies increase the risks. The quality of receivables and intangible assets also poses clear risks. In our view, the Q3 report did not yet show clear signs of a sustained improvement in the risk and cash flow profile, although the cash flow moved to the right direction. We believe that the risk/reward ratio for investors is still unsatisfactory when considering the overall picture. We emphasize that a target price for Tecnotree is illusory in the current situation and recommend that investors pay particular attention to the recommendation.a