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Pihlajalinna - Towards profitability improvement

Pihlajalinna will report its Q3 earnings on next week’s Tuesday, 5th of November. Our interest is on how the execution of the efficiency improvement program is going and what are the impacts for Q3. We have increased our revenue and earnings estimates by 1-2%, resulting from the cooperation agreement with Pohjola Insurance. We keep our rating “BUY” with TP of EUR 12 ahead of Q3.

Changes in service network

Pihlajalinna has faced efficiency problems especially with the new clinics which has impacted negatively on the company’s profitability. In order to improve profitability, the company launched an efficiency improvement program in H1 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. We have already seen some actions taken during Q3 as the company has announced changes (mergers and unit closures) to its service network at least in Eastern and Southwest Finland.

Cooperation agreement with Pohjola Insurance

Pihlajalinna and Pohjola Insurance signed a cooperation agreement in early September which is a continuation to the successful pilot project that took place during the summer. The company estimates that the turnover from the contract could be some EUR 5-10m per annum, which means 1-2% increase in revenue. As a result of the agreement we have increased our revenue and earnings estimates by 1-2% for 2020E-2021E.

We retain “BUY” with TP of EUR 12

We expect Q3’19E revenue to grow by 5.8% to EUR 123m (cons. of EUR 122m) driven by new clinics and fitness centers. We expect adj. EBIT of EUR 6.8m (cons. of EUR 5.4m) resulting in EBIT margin of 5.6%. We expect profitability to improve from last year as some of the costs savings are expected to be shown already in Q3’19. We keep our rating “BUY” with TP of EUR 12.

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