Pihlajalinna - Profitability expected to increase in Q1

Pihlajalinna will report its Q1 earnings on May 3rd. As before, profitability and new contract pipeline are of interest but also comments on the failure of SOTE reform and its impacts. Our estimates reflect the IFRS 16 changes. We keep our rating “BUY” with target price of EUR 12.0 ahead of Q1.

No major pipeline changes in Q1

Pihlajalinna expects its profitability and organic growth to increase in 2019E. The company will continue its expansion especially into regional capitals in 2019E-2020E. However, the failure of SOTE reform keeps the pipeline uncertain as municipalities’ eagerness to strike new contracts is impacted by SOTE. Provision of occupational healthcare services for Stora Enso started in Jan 2019 (we estimate value at EUR ~4m).

Acquisition of fitness centers continued in Q1

Pihlajalinna has expanded its services into wellbeing and preventative occupational healthcare. The company bought Forever fitness center chain in Feb 2018. The acquisition of Leaf Areena in Turku further expanded Pihlajalinna’s wellbeing services and the first Forever LITE fitness center was opened in Tampere in late 2018. Following the strategy, Pihlajalinna acquired FIT1 chain in Q1’19, adding five new fitness centers to its portfolio.

Retaining “Buy” with TP of EUR 12 ahead of Q1

Pihlajalinna published its restated financials for 2018 with IFRS 16 changes. Right-of-use assets increased by EUR 86.7m and interest-bearing debt by EUR 88m. We have updated our model to be in line with the restated figures but kept the underlying estimates unchanged. We expect Q1 revenue of EUR 126m and adj. EBITDA of EUR 13 (10.1 % margin). We expect profitability to increase in 2019E from last year’s weaker results caused by high start-up costs, transfer and M&A fees as well as high public specialized care costs. Our rating and target price (“Buy”, TP EUR 12) are unchanged ahead of Q1.

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