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Vaisala - W&E business hurting from corona

Vaisala issued yesterday a profit warning due to estimated impacts related to the coronavirus pandemic. Consequently, we’ve revised down our estimates for 2020. Despite Vaisala being a great company, we see current valuation unattractive given the weakened financial outlook. We maintain our SELL with new target price of 25 euros (prev. 29.5).

W&E’s project and services business suffering from corona
Vaisala expects delays or interruptions particularly in project and services deliveries due to the extensive restrictions imposed by governments and authorities. Demand in W&E has to some extent already weakened and Vaisala estimates that the situation will become more challenging as governments have tighter budgets, especially in emerging markets. The profit warning did not come as a complete surprise given that Vaisala’s largest segment, W&E, consists roughly 40-45% of projects and services, and the growth is very dependent on investments from emerging market governments. Vaisala does not expect demand for IM to change materially, but growth will slow down from last year (+22.2%).

New guidance broader as predicting is currently difficult
Vaisala’s now expects 2020 sales will be between 370–405 MEUR and EBIT between 34–46 MEUR (prev. sales 400–425 MEUR and EBIT 38–48 MEUR). The outlook’s range for both net sales and EBIT is wide due to high uncertainty related to the duration and impact of coronavirus pandemic as well as unknown speed of recovery. Vaisala will provide an update to its market outlook in connection with its Q1 report due next week on Tuesday 28th.

Valuation still stretched given weakened financial outlook
Based on the new outlook, we have cut our estimates for 2020e and the coming years. For 2020e, we’ve cut our sales and EBIT estimates with 8% and 20% respectively. We expect 2020e net sales to decline 3% to 390 MEUR and reported EBIT to decline to 34.9 MEUR, mainly due to lower performance in W&E. On our renewed estimates, Vaisala is still trading at clear premiums compared to our peer group, which we do not see justified given the financial performance outlook currently weighed down by W&E. We maintain our SELL with new target price of 25 euros (prev. 29.5). Our target price values Vaisala at 20e EV/EBIT multiple of 25x which is still above peer group, reflecting Vaisala’s strong sustainability profile, growing dividend, and especially IM’s highly profitable growth with possibility of further add-on acquisitions.

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