Pihlajalinna - Expecting a profitability turnaround in 20E

Pihlajalinna’s Q4 revenue was as expected at EUR 133.8m (Evli 133.6m) but profitability was weighed down by increased costs. Q4 adj. EBIT amounted to EUR 5.6m (Evli 7.8m). The tender offer by Mehiläinen is currently being reviewed in FCCA and the process is expected to be completed at the end of Q2’20 or latest during Q3’20. For ‘20E we expect a clear improvement in profitability. We keep our rating “HOLD” with TP of EUR 16.

Q4 revenue in line – adj. EBIT missed expectations

Pihlajalinna’s Q4 revenue of EUR 133.8m (5.4% y/y) was as anticipated (Evli/cons EUR 133.6m/134.4m) but adj. EBIT of EUR 5.6m missed the expectations (Evli/cons EUR 7.8m/8.5m). Profitability was hampered by increased costs related to public specialized care which were concentrated towards the end of the year. Volume and profitability developed favorably in sales to insurance companies (revenue up by 18.1% y/y) but also in occupational healthcare, following the acquisition of Terveyspalvelu Verso. Due to the tender offer by Mehiläinen, no dividend for ’19 is proposed (Evli/cons EUR 0.15/0.15).

Expecting a turnaround in profitability

In ’19, the performance especially in occupational healthcare was good as revenue in the segment grew more than 25% y/y. Profitability was positively impacted by increased share of fixed price services and development of operational models. We expect further growth in occupational healthcare but also in sales to insurance companies, of which, the latest agreement with Pohjola Insurance is an example. Due to the uncertainties around the social and healthcare reform, municipalities have become more active on outsourcing projects. In late ’19, Kristiinankaupunki and Pihlajalinna agreed on a partial outsourcing deal, starting in ‘21E, with total value of EUR ~90m. The contract is at least for 15 years. For ‘20E we don’t expect any new outsourcings to occur. We expect profitability (adj. EBIT) to improve by 68% y/y in ’20E and by 7% y/y in ‘21E due to the cost savings resulting from the efficiency improvement program that was launched last summer. We expect ’20E-‘21E revenue growth of ~3-4%.

“HOLD” with TP of EUR 16 intact

The tender offer by Mehiläinen is currently being under review of FCCA. The first phase investigation will be completed by mid-March though it is highly likely that FCCA will initiate continued phase two proceedings after phase one, meaning that the process is likely to be completed at the end of Q2’20E or latest during Q3’20E. According to Pihlajalinna’s guidance, ‘20E revenue and adj. EBIT are expected to increase from ‘19. We expect ‘20E revenue of EUR 538m (3.8% y/y) and adj. EBIT of EUR 35.1 (68% y/y). Our target price is in line with the tender offer price of EUR 16. We keep our rating “HOLD”.

Open Report