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Pihlajalinna - Limited surprises

Pihlajalinna’s Q4 financials were close to estimates and guidance did not surprise. While new outsourcing contracts from previous or ongoing negotiations remains uncertain, the expanded geographical reach should improve prerequisites for growth in other areas as well. We think valuation continues to look attractive. We retain “Buy” rating with TP of EUR 12.

Profitability at reasonable level in Q4

Pihlajalinna’s adj. EBITDA margin improved y/y in Q4, after improving to flat y/y level in Q3 from weaker H1. However, of the EUR 2.6m y/y adj. EBITDA improvement EUR 2.4m was explained by improved profitability in public specialized care, which seemed to be largely due to service provider refunds from hospital districts related to cost accruals. Amount of these refunds has fluctuated a lot historically. Profitability thus looked better than it was in underlying terms, but it was still at a reasonable level in our view.

Not much new to tell of the new contract pipeline

Pihlajalinna has been in negotiations over new potential contracts with Laitila, Ruovesi and Kristiinankaupunki. While decisions from some of these were expected by the end of 2018, each remains undecided. Overall, municipalities’ eagerness to strike new contracts remains impacted by the uncertainty related to the SOTE reform. Activity could increase if SOTE fails in the coming weeks, but overall visibility for how municipal activity develops is not great, in our view. Yet with the expanded clinic network the company should be better positioned to win new business for example in occupational healthcare, in our view.

Retaining “Buy” with TP of EUR 12

On our estimates Pihlajalinna trades 7.7x and 6.8x EV/EBITDA in FY19-20E, respectively. We think valuation continues to look attractive. We retain “Buy” rating with TP of EUR 12.

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