Pihlajalinna - Potential continues to realize

Top line drove EBIT as higher outsourcing costs remained a drag on relative profitability. Corporate and private volumes were still below pre-pandemic levels, meaning business normalization is set to support further gains.

Adj. EBIT gained EUR 1.3m y/y despite outsourcing costs

Revenue grew 13% y/y in Q3; the EUR 141m figure topped the EUR 136m/138m Evli/cons. estimates. Public sector revenue grew 18%, more than estimated. Corporate and private customer revenues were a bit soft relative to estimates; the former was up 11% y/y while the latter was down 5%. Adj. EBIT improved to EUR 10.0m vs the EUR 10.6m/9.0m Evli/cons. estimates despite the mix being tilted more towards the public sector than expected while the outsourcing EBIT margin declined by 330bps y/y to 3.5% (higher service care requirements raised costs). We also gather Pihlajalinna is making progress on this front to receive better compensation in the future. Q3 adj. EBIT margin improved only by 10bps y/y to 7.1% due to the outsourcing cost drag; going forward there should be good scope for meaningful improvement as private volumes continue to improve and Pihlajalinna gets more compensation for outsourcing costs.

Organic improvement in addition to the Pohjola acquisition

Q3 is the most profitable quarter and the EUR 11.8m in Covid-19 services revenue was an additional help. We believe Covid-19 revenue will decline a bit q/q in Q4 but should still reach a meaningful level. Pihlajalinna continues to make additions to its facility network but capex levels are to remain modest while focus is more towards digital services. The Pohjola Hospital acquisition is set to close early next year and Pihlajalinna will provide an update on financial targets near the completion. Pihlajalinna expects to realize sizable cost synergies while insurance co-operation drives volumes. The target’s revenue fell in part due to the pandemic, but size was also diminished because of the decision to divest occupational health activities.

Good earnings as well as multiple expansion potential

We make minor estimate revisions. Our FY ’21 EBIT estimate stands almost unchanged at EUR 32.1m. Valuation is undemanding relative to peers in the short-term (8x EV/EBITDA and 16x EV/EBIT on our FY ’21 estimates) while margin potential underpins further upside. Our TP is EUR 14.0 (13.5); rating is BUY.

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