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Pihlajalinna - Upgraded to “Buy”

Pihlajalinna profitability turned to positive in Q3. Growth prospects now also look better, with new contracts and a more promising pipeline. We think valuation is now attractive against improving growth and profitability prospects. We upgrade to “Buy” (“Hold”) with TP of EUR 12.

Profitability turned to the better

The main surprise in Pihlajalinna’s Q3 report was better than expected profitability. Adj. EBITDA margin was at last year’s level in Q3, after weakening clearly in H1. Organic growth also turned positive (+1%), after being negative in H1 (-2%). Profitability is still not at the targeted level, but the worst should now be behind. Management sees potential to improve profitability both in the private and public sides of the business.

Growth prospects now look brighter

Pihlajalinna started production of residential services in Laihia in Sep 2018, with an annual value of about EUR 5m. Provision of occupational healthcare services for Stora Enso will start in Jan 2019 (we estimate value at EUR ~4m). Negotiations for provision of residential services with about EUR 5m value are ongoing in Laitila. Ruovesi is considering joining Pihlajalinna’s existing Mänttä-Vilppula contract, with potential value of some EUR 15m, and a decision from the Kristiinankaupunki tendering should arrive by the end of the year.

Less risk of profitability pressure

Pihlajalinna altered its expansion plan and no longer expects to open new surgical units this or next year. Expansion will be primarily based on M&A and potential municipal projects, rather than new larger clinic openings. Additionally, OP recently announced its retreat from expansion plans. These reduce the risk of added capacity burdening profitability in the mid-term.

Upgraded to “Buy” (“Hold”), TP intact at EUR 12

On our estimates Pihlajalinna now trades 8.6x and 7.2x EV/EBITDA in FY19-20E, which translate into 12-17% discount to the peer group. We consider valuation attractive against improving growth and profitability prospects and upgrade to “Buy” (“Hold”) with an intact TP of EUR 12.

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