Solwers

Solwers posted H1 revenue 3% ahead of our estimate, as organic growth was slightly positive, while we had expected a slight decline. H1 EBIT of EUR 2.0m came in 27% below our estimate of EUR 2.7m; almost half of the negative deviation was explained by one-offs from e.g. higher contingent considerations from previously completed acquisitions, as well as costs related to preparation for its possible transfer to the main list of Nasdaq Helsinki. After the H1 report, we raise our top-line estimates for 2024-26 by 2-4%, but cut our adjusted EBIT estimates by 7-8%, as we forecast a somewhat slower recovery in profitability. Consequently, our DCF- and peer-based fair value range is trimmed to EUR 4.8-5.7 (5.1-6.0), which includes EUR 0.7 per share in present value of unannounced acquisitions. We believe Solwers will continue with its M&A-driven strategy and see further margin improvement potential once the market recovers. Marketing material commissioned by Solwers.

Solwers posted H1 revenue of EUR 39.9m, 2% above our expectations while profitability was lower due to e.g. preparation costs related to a possible transfer to the main list of Nasdaq Helsinki. H1 growth was 20% driven by acquisitions conducted in 2023 and early H1 in particular. H1 EBIT of EUR 2.0m declined by 21% y/y and the EBIT margin declined to 4.9% from 7.5% in H1 2023. Operating cash flow improved to EUR 1.1m from EUR 1.0m a year ago, The billing rate was largely unchanged at 82%. EPS was EUR 0.07 per share, down from EUR 0.15 y/y. The headcount at the end of H1 was 690. In the CEO comment it is mentioned that the overall market uncertainty has persisted. The company now expects moderate improvement in the business climate towards the end of the year and the outlook for 2024 remains unchanged. The company does not provide a financial guidance for 2024. We expect a neutral to slightly negative share price reaction.

Ahead of Solwers' Q2 report on 30 August, we update our estimates to reflect two acquisitions conducted in Q3, which on an annual basis increase revenue by ~4%. At the same time, we lower our organic growth estimate for 2024 from -2% to -3% and our 2025 estimate from +4% to +3%, as we see a risk of a somewhat postponed recovery in the market. Our fair value, excluding any unannounced M&A in 2025-26, remains unchanged at EUR 4.4-5.4, while we trim our fair value including unannounced M&A to EUR 5.1-6.0 (5.2-6.1). The Solwers share price has been surprisingly weak recently and is down 33% year-to-date. The share is trading at a substantial discount to all relevant peers and even without any unannounced M&A in our estimates, we see over 30% potential upside. Marketing material commissioned by Solwers.

Solwers’ subsidiary WiseGate has today signed an agreement to acquire 100% of Spectra Consult AB shares. Spectra Consult was founded in 2019 and today employs about 20 skilled consultants focusing on design and supervision for customers primarily engaged in the fields of electric power, national defence, and public civil engineering. Spectra Consult had revenue of SEK 19.9m (EUR ~1.7m) with an EBIT margin of 16.3% in 2023 and SEK 14.7m (EUR ~1.3m) with a margin of 15.9% in 2022. The acquisition will be reported as a part of Solwers as of 1 August 2024. Spectra Consult and WiseGate have collaborated for years on numerous projects and the acquisition seems like a natural continuation of this collaboration. The purchase price is not disclosed, but a part of the purchase price is paid in 62,471 newly issued Solwers shares (EUR ~220k) and the rest will be paid in cash. Based on earlier acquisitions made by Solwers’, we estimate the valuation could be 5-7x EV/EBIT, corresponding to a price of EUR ~1.3-1.9m, assuming the target has zero net debt. The acquisition adds ~1% and ~2% to Solwers’ 2024E sales and EBIT, respectively, accounting for the start of the consolidation period. Compared to full year 2023, the acquisition adds ~3% and ~6% of revenue and EBIT respectively. We view the news as positive, as Spectra Consult seems to be a well-run company with a strong financial performance, assuming the price is close to our estimated range.

Solwers’ subsidiary Davidsson Tarkela Architects Oy has today signed an agreement to acquire 100% of Siren Architects, Finland’s oldest architectural firm. For the last reported 12 month period (3/2023-2/2024), Siren Architects had revenue of EUR 1.75m and an adjusted EBIT margin of 13.5% (EUR ~240,000) versus EUR 1.74m and 14.4% the previous year, respectively, and employs 18 professionals. The acquisition will be reported as part of Solwers as of 1 July. Design references include numerous residential and office buildings, educational institutions, sports facilities, renovations and urban planning including many landmark buildings in Finland. The purchase price is not disclosed, but part of the purchase price is paid in 103,632 newly issued shares (EUR ~400,000) and the rest in cash. If we assume 25-30% of the purchase price is paid with shares, the purchase price corresponds to an EV/EBIT multiple of 5.6-6.7x assuming Siren Architects has zero net debt. The acquisition adds 3% to Solwers’ 2023 sales and 5% to EBIT. We view the news as positive as Siren Architects appears to be a quality company and performing well, assuming the purchase price is close to our estimated range and not substantially above.

We initiate coverage of Solwers, a company that acts as a growth platform for the built environment consultancy sector in the fields of architecture, technical consulting, project management, environmental monitoring, circular economy and digital solutions. Solwers' growth strategy, targeting over 20% annually, is based on acquisitions with virtually no integration, and instead letting the subsidiaries operate under their own brands. However, we believe that there are clear top-line synergies that can be achieved. Given Solwers' strong balance sheet, we see ample M&A-driven growth opportunities ahead, with underlying earnings recovering in 2025E. Based on DCF, peer group valuation and M&A-driven value creation, we derive a fair value range of EUR 5.2-6.1 for the Solwers share. Marketing material commissioned by Solwers.