Pihlajalinna - Aiming for profitability turnaround
Q2 earnings weaker than expected
Pihlajalinna’s Q2 earnings fell short of expectations. The company’s revenue was EUR 130m vs. EUR 134m/132m Evli/cons. Revenue grew by 3.5% of which organic growth was 1.5% y/y. Adjusted EBITDA was EUR 10.8m (8.3% margin) vs. EUR 13.3m/13.2m (9.9%/9.9%) Evli/cons. EBITDA was negatively impacted by unequal resourcing of units and general salary increases. Adj. EBIT was clearly below expectations at EUR 2.1m vs. EUR 4.8m/4.6m Evli/cons. In a group level, EBIT was negative in April and May but improved in June. Profitability improved in the Forever fitness center chain and in public specialized care but decreased in outsourced primary care and social care services, private clinics, surgical operations and dental care services. Seasonality impacted the Q2 result as well.
Strong actions to improve profitability
Pihlajalinna’s long-term target is to increase its EBIT margin to over 7%, which so far has seemed rather distant. The company has faced efficiency problems especially with the new clinics which has impacted negatively on the company’s profitability. The company indicated that it has several loss-making clinics. In order to improve its profitability, Pihlajalinna launched an efficiency improvement program that aims to achieve annual cost savings of EUR 17m. The planned cost savings are expected to be realized during 2020. As a result of the efficiency improvement program the company informed that it will merge units but closures of some of the loss-making clinics are also possible. The focus is on operational management. The company estimated that the efficiency improvement program will help to reduce costs in H2’19 by approximately EUR 5m. The program involves a non-recurring item of approximately EUR 8m, which will be allocated to Q3’19 as an adjustment item. Despite of the weak Q2 result the company reiterated its guidance for 2019E and expects revenue to increase from 2018 and EBIT clearly to improve from last year.
High activity in M&A and partnerships
Pihlajalinna has been active in M&A and partnerships in H1’19 but the company has also been able to grow organically. During Q2, the company released a letter of intent on co-operation with Pirkanmaa Hospital District. The partnership seeks to design new and innovative service models with a strong customer focus. The company has also agreed on pilot co-operation with Pohjola Vakuutus. During the review period, Pihlajalinna has further expanded its occupational healthcare network by acquiring Raisio’s Aurinkoristeys occupational healthcare units and the Kouvola Työterveys occupational healthcare unit. Pihlajalinna also opened an occupational healthcare center to Rovaniemi in August. In H2’19, the company seeks to improve its services in its healthcare centers but also in mobile. Improved remote services should further support the company’s efficiency. Pihlajalinna sees that the collapse of social and healthcare service reform has activated municipalities and the company has indicated that it has new possible contracts in the pipeline.
We retain “Buy” with TP of EUR 12 (prev. EUR 13)
As a result of the weak Q2, we have decreased our 2019E estimates. We now expect 2019E revenue of EUR 516m (prev. EUR 525m). We expect adj. EBIT of EUR 20m (prev. EUR 24m) resulting in EBIT% of 3.9% (prev. 4.6%). Despite of the expected EBIT improvement (42.8% y/y) from 2018, 2019E earnings remain uncertain. If the planned efficiency improvements succeed in 2020E we expect a turnaround in profitability and the company to move towards its EBIT% target of 7%. On our estimates, Pihlajalinna trades at 2019E-2020E EV/EBITDA multiple of 7.5x and 6.1x, which translates into ~27% discount compared to the peer group. We keep our rating “Buy” with new TP of EUR 12 (prev. EUR 13).