Tecnotree Q2'24: Cash flow improving slower than we expected

This report is a summary translation of the report “Kassavirta paranee odotuksiamme hitaammin” published on 8/12/2024 at 8:40 am EEST.

Tecnotree's Q2 key figures missed our forecasts. Cash flow improved as expected from the beginning of the year and the company provided cash flow guidance for the rest of the year. However, free cash flow is expected to remain tight again this year, which means that we do not see the stock's risk/reward as particularly attractive. Given our lower forecasts and the increased number of shares, we lower our target price to EUR 5.5 (previously EUR 6.0) and reiterate our Reduce recommendation.

Q2 figures missed our forecasts

Tecnotree's Q2 revenue decreased by 3% to 18.7 MEUR, far below our forecast of approximately 5% growth. The deceleration in growth is partly due to the changeover to the ARR model, but also to the slowdown in order flow seen in the first months of the year. The order book has now shrunk for two consecutive quarters (Q2’24: 72.6 MEUR, 2023: 80.2 MEUR), which is inevitably reflected in the revenue development. In Q2, Tecnotree's EBIT was 3.5 MEUR (Q2’23: 6.2 MEUR), which, however, was burdened by a total of 2.9 MEUR in write-downs of capitalized product development costs and receivables related to the sale of business assets. Adjusted EBIT was 6.4 MEUR, which was also slightly below our forecasts (7.0 MEUR). 

Cash flow improved as expected from the beginning of the year and the company issued cash flow guidance

Cash flow improved as expected from the first months of the year, with cash flow from operating activities of 4.4 MEUR and free cash flow of 0.7 MEUR in Q2. The company also provided cash flow guidance for the rest of the year, with an expected free cash flow of 2-5 MEUR in H2. Free cash flow for H1 was -3.8 MEUR, so the guidance for the full year is for a free cash flow of -1.8 - 1.2 MEUR. The improved cash flow visibility is of course positive, but cash flow does not yet reflect anything close to the company's profit level and is still expected to remain modest overall this year.

Earnings guidance seems challenging

Tecnotree still expects revenue growth of 2-7% and EBIT growth of 7-15% in 2024. Especially with regard to EBIT growth, we believe that the guidance is difficult to achieve as we believe that the guidance refers to reported EBIT. Reported EBIT was down about 18% in H1, so the company has a lot of catching up to do for the rest of the year. Contributing to the earnings growth is the company's significant cost-saving program, where the company is targeting savings of 4.5 MEUR for H2. For the full year, we expect revenue to grow by just over 2% to 80.3 MEUR and reported EBIT to increase by 1% to 24.1 MEUR. Consequently, we expect the company to fall short of the guidance in terms of reported EBIT, but we expect adjusted EBIT to increase by 13% to 27.0 MEUR. 

With current cash flow generation capacity, valuation is not appealing

Tecnotree's P/E multiples for 2024-2025 are 5x and corresponding EV/EBIT multiples are 3x. The levels are low, but one should consider the low quality of the result (the result does not reflect cash flow). The current year's EV/OFCF multiple is 20x, which is high as it does not take into account FX losses. 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 around 42% at the current share price). The company has scope to improve its cash flow profile through geographic expansion, business model change and adjustment measures, but at the current valuation we are still waiting for evidence of this.