Consti - Time to regain profitability

Consti has had project management related issues, which has dented earnings during the past year, and has been taking measures to improve profitability. We expect margin recovery, although risks to future earnings still remain. We downgrade to HOLD (BUY) with a target price of EUR 6.0.

Leading renovation company seeking to regain profitability

Consti is a market leader in the less cyclical Finnish renovation market, where the demand outlook remains good due to among other things an ageing building stock. Consti’s performance has during the past years however been hampered by internal project management and execution related issues, which has left a dent in profitability. Consti has been implementing changes towards a more customer-centric organization and to increase operational efficiency, expected to also aid profitability through cost-savings.

Expecting margin recovery

We expect Consti’s focus to be on improving margins and as such estimate only slight sales growth for the coming years, with our estimated 2018-2021E sales CAGR at 2.2%. Sales growth has been affected by the implementation of stricter tendering criteria, which we expect to continue to have an effect, but on the other hand has a reductive effect on possible further unprofitable projects. A larger share of the unprofitable projects have been completed but open risks still remain. We expect profitability to be supported by a lesser impact of the unprofitable projects along with an alleviation of the pressure from subcontractors and suppliers following boom years in building construction volumes. Our EBIT-margin estimate for 2019E is 2.2%.

HOLD (BUY) with a target price of EUR 6.0

Consti trades at a 22%/31% discount on 2019E EV/EBIT to our mainly Nordic construction and building installations and services peer groups. With and elevated risk profile due to internal project management issues and the on-going arbitration proceedings in the Hotel St. George project we consider a discount justifiable. We value Consti at 9.2x 2019E EV/EBIT for a target price of EUR 6.0 and downgrade to HOLD (BUY).

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