Strongly growing company in social welfare and healthcare field
Pihlajalinna’s profitability challenges continued to be way worse in Q4 than estimated. The company has many tools to address the issue. Gains are very likely this year due to the low comparison figures (and measures), but valuation now appears neutral from a short-term perspective.
Q4 was still plagued by many profitability-hurting issues
Pihlajalinna’s top line continued to grow at an annual rate of 22% in Q4; organic growth remained above 7% even with the headwind from lower Covid-19 services revenue. The lack of such services was one factor limiting profitability, in addition to continued high absence costs as well as public specialty care costs which were now tilted towards Q4. Employee benefit expenses were especially high. Key profit measures missed estimates by EUR 7m. Pihlajalinna guides increasing revenue (we estimate 3% growth) and improving adj. EBITA for the year. Last year involved a lot of transient cost factors, but the company also takes many measures to address the profitability challenge.
H2’23 should see meaningful earnings growth
Pihlajalinna has gone through a similar exercise in 2019. The company looks to e.g. cut physicians’ administrative roles and prune its service network. Price increases are to come in at 5-10%, especially within the private sphere while public contracts are also under review. The company’s financial headroom is now tight, but it stays within its covenant terms and doesn’t pay dividend for the year. We cut our FY ’23 EBIT estimate by EUR 5m but estimate EUR 12m EBITA improvement for the year.
At least the first quarters now seem to lack upside drivers
Valuation isn’t too cheap despite the profitability gains which are to be seen this year. The 19x EV/EBIT valuation, on our FY ’23 estimates, is neutral at best as it is in line or even slightly above that of peers. For FY ’24 we estimate an EBIT margin of 5.4% (some 100bps gain y/y), which may well prove too conservative, but the respective 14x multiple is still no more attractive than peer multiples. Pihlajalinna’s profitability measures are more likely than not to drive upside over the longer perspective, but in our view the share lacks material upside drivers from a short-term perspective. Pihlajalinna could specify its guidance upwards later this year, which would be one such driver. We revise our TP to EUR 9.0 (10.0); our new rating is HOLD (BUY).
Pihlajalinna’s Q4 report was a clear disappointment in terms of profitability even after the guidance downgrade late last year. The culprits for low profitability have been discussed many times, but their adverse impacts on Q4 bottom line were clearly larger than estimated.
Pihlajalinna reports Q4 results on Feb 17. Last year the company positioned itself for growth, while this year focus rests more on profitability enhancing initiatives.
Less growth and more earnings this year
Pihlajalinna revised FY ’22 guidance down in Q4 as the factors which hit EBITA earlier in the year persisted. Capacity additions hurt earnings especially in H1, while certain cost inflation and productivity issues continued to weigh H2. Covid-19 services have also been missing, but other than that there have been no demand side issues. Organic growth has been robust, and the Pohjola Hospital acquisition helped the company grow at a high-teens rate in FY ’22. We make no changes to our Q4 estimates. We estimate 3% growth for FY ’23 and ca. EUR 10m profitability increase; we expect Pihlajalinna to guide flat growth and increasing EBITA for the year as the company is now done with its late capacity expansion and will focus on enhancing margins.
Capacity costs have been accompanied by other items
The two larger Finnish players, Mehiläinen and Terveystalo, had major issues last year despite strong growth. Mehiläinen, more than twice the size of Pihlajalinna in revenue, saw its profitability decrease by ca. EUR 35m due to many issues such as inflation and labor shortages. Pihlajalinna likewise has endured some cost inflation as well as labor issues due to both high sick rates and tight availability of recruits. The announced negotiations play their part in managing costs, while Pihlajalinna also divests its EUR 16m dental business, a small alleviation to the indebtedness issues. Price hikes prop top line in FY ’23, but we would also like to hear views on volumes. Public queues need to be dealt with, one area which could add volumes. Organic growth outlook is decent; there are minor top line headwinds due to the dental divestment as well as outsourcing restructurings, but these represent only ca. 5% of revenue and support margins.
Valuation unchanged and relatively undemanding
Pihlajalinna’s valuation, 14x EV/EBIT on our FY ’23 estimates, hasn’t changed in the past few months, while peer multiples have seen some gains. In our view the valuation leaves adequate upside potential as the roughly 5% EBIT margin we estimate for the year remains well short of the company’s long-term earnings potential. We retain our EUR 10 TP and BUY rating.
Pihlajalinna’s guidance downgrade wasn’t very big news as costs have remained relatively high over the course of this year. Demand is strong, but short-term upside is now more limited due to the uncertainty around FY ’23 improvement.
Q4 EBITA not to improve that much
Pihlajalinna downgraded its guidance. Top line will still increase substantially, but FY ‘22 adj. EBITA is to decrease relative to the EUR 37.3m comparison figure. The earlier guidance suggested flat EBITA, and we previously estimated the figure at EUR 36.5m. We revise our Q4 EBITA estimate down to EUR 9.0m and hence now see the FY ’22 figure at EUR 33.5m. We note the EUR 7.8m figure seen in Q4’21 was weighed down by some EUR 2m in extraordinary high service costs within complete outsourcing contracts, and hence Pihlajalinna should be able to achieve at least flattish y/y profitability development in Q4’22.
EBITA is bound to improve next year
Pihlajalinna has scaled up its capacity over the past year; volumes and revenue have followed pretty much according to plan. Pohjola Hospital burdened profitability in H1, while new clinic ramp-ups continued to drag Q3 results. Personnel absence-related costs moderated a bit in Q3 but were still EUR 1m. Lower Covid-19 services revenue was another headwind. Pohjola Hospital cost synergies have already been realized and the units are profitable, but there’s still work to be done in driving higher capacity utilization rates across the network and especially within high value-added categories such as surgery procedures. Demand continues at a high level and Pihlajalinna has scope to raise prices; in our view profitability is set to follow up with top line next year, however we revise our FY ’23 profitability estimates down by EUR 3m.
Uncertainty around FY ’23 improvement pace limits upside
We make no changes to our revenue estimates as in our view the update concerns the cost levels which have continued relatively high. Pihlajalinna is valued at 14x EV/EBIT on our FY ’23 estimates, which is still not a high figure relative to peers while we estimate the respective EBIT margin almost 300bps below peers’. Long-term potential should remain large, but uncertainty around costs limits upside at least in the short-term perspective. Our updated TP is EUR 10 (11); we retain BUY rating.
Pihlajalinna’s Q3 ramp-up costs were larger than expected, but Q4 should already show a clear y/y EBITA improvement.
There were still many profitability headwinds in Q3
Pihlajalinna’s Q3 revenue was EUR 165m, compared to the EUR 167m/165m Evli/cons. estimates. The 17.5% growth was driven by corporate and private volumes, which grew strong also on an organic basis when considering the headwind from lower Covid-19 services revenue (e.g. surgical procedures grew 61%). The mix was tilted less towards public customers, where profitability improved within outsourcing agreements due to efficiency measures, than we estimated. Private clinic capacity ramp-up costs, in addition to lower Covid-19 revenue, limited profitability as fixed costs were high during the summer months. Personnel-absence related costs, at EUR 1.0m, were lower than before, however there’s still uncertainty as to how these will develop in Q4. The EUR 9.4m adj. EBITA missed our estimate by EUR 2.6m, while the EUR 7.3m adj. EBIT was EUR 2m below the consensus.
Q4 and FY ’23 EBITA are set to see meaningful gains
Pihlajalinna retained its guidance, which now implies ca. EUR 5m y/y EBITA gain for Q4. The comparison figure suffered a EUR 2m hit from high costs within complete outsourcing contracts, so Pihlajalinna should still be able to reach a steep y/y improvement especially when ramp-up costs are to no more burden Q4 that much. Q4 also has some favorable seasonal demand patterns going on, including influenza vaccines, and the capacity additions (high value-added categories like surgical services) should have a significant EBITA contribution throughout next year. Pihlajalinna’s growth strategy is focused on major Finnish urban regions and increasingly relies on remote service paths to drive procedure volumes. Pohjola Hospital cost synergies have been taken in and hence the focus there is also on driving higher volumes. Pihlajalinna has already made some upward pricing adjustments and the tailwind continues to support next year.
Uncertainty around improvement pace, yet plenty of upside
The capacity drive-up has lifted indebtedness, but Q4 should provide a clear demonstration of higher EBITA. Pihlajalinna is valued around 13x EV/EBIT on our FY ’23 estimates, where the 5.6% EBIT margin estimate is still well below peers’ and long-term potential. Our new TP is EUR 11.0 (12.5); retain BUY rating.
Pihlajalinna’s Q3 revenue landed close to estimates, whereas profitability came in on the soft side. In our view the roughly EUR 2m miss in profitability could be at least partly attributable to capacity ramp-up costs.
Pihlajalinna reports Q3 results on Nov 4. We still expect Q3 EBITA to have remained a bit muted, but Q4 should see earnings growth while multiples and margins imply upside.
High growth to have continued in Q3, EBITA flat y/y
Pihlajalinna grew strong in Q2, due to organic and inorganic growth within corporate and private customers, and we wouldn’t expect Q3 to have been much different in this respect. Capacity has increased a lot over the past few quarters, while Q3 still saw an increase albeit a more marginal one. Demand has kept up with the supply increases, and this should continue to be the case going forward even with self-paying private customers as Pihlajalinna is the lowest cost provider; the company has done some price hikes earlier this year, while prices are to rise further in H2 and especially within private customers next year. We don’t thus expect the inflationary environment to pose major hurdles as Pihlajalinna should be positioned to find compensation for e.g. higher energy costs (which are often not that significant except for certain specialty practices). We estimate Q3 revenue to have grown 19% y/y to EUR 166.8m and see EBITA at EUR 12.0m.
Q4 EBITA should see a significant y/y increase
We don’t expect EBITA to have yet increased y/y, despite high growth and positive results from Pohjola Hospital, as we understand employee sick leave rates to have remained relatively high in Q3 although a bit more moderate than in H1. We continue to expect further improvements in capacity utilization rates to drive Q4 EBITA to a gain of some EUR 3m y/y. Our H2 EBITA estimate is in line with guidance; we don’t expect Pihlajalinna to make changes to its guidance at this point, but in our view Q4 results could still end up driving FY ’22 EBITA higher than the current guidance implies. In any case, longer term earnings drivers are in place; Pihlajalinna has plenty of margin potential left as demand picks up while Pohjola Hospital continues toward above 20% EBITDA margins.
Valuation very much on the undemanding side
Pihlajalinna is unlikely to make further M&A moves in the short and medium term as organic growth potential remains plentiful. The 12x EV/EBIT valuation, on our FY ’23 estimates, isn’t challenging as we estimate the margin at 6%, still well below many peers. We retain our EUR 12.5 TP and BUY rating.
Pihlajalinna’s Q2 didn’t deliver many surprises; we expect further improvement to materialize over the course of H2.
Q2 results were overall quite close to estimates
Pihlajalinna grew 22% y/y; the EUR 174m revenue topped the EUR 170m/167m Evli/cons. estimates thanks to strong corporate as well as private customers, although the latter volumes are still lagging relative to 2019. Outsourcing profitability improved by EUR 0.7m y/y, despite continued high costs, due to efficiency measures, index adjustments and service fee refunds. H1 employee costs were exceptionally high by EUR 2.5m; the burden was slightly higher in Q1 than in Q2, but together with capacity additions (including four new private clinics) meant profitability excluding outsourcing fell by EUR 2.3m y/y in Q2. The EUR 16.9m adj. EBITDA was in line with estimates while the EUR 5.2m EBIT was a bit soft relative to the EUR 5.9m/6.3m Evli/cons. estimates.
We expect H2 improvement to be visible in Q4 profitability
Q3 absences have been lower so far, but the situation could again change over the fall. Capacity scales further up, however Pihlajalinna has already added most of its targeted level and hence higher utilization rates should drive profitability in H2. Pihlajalinna has also increased prices while inflation appears to be manageable. Q3 EBITA will remain burdened y/y, yet Q4 could achieve significant y/y improvement (Q4’21 was negatively affected, by some EUR 2m, by a spike in complete outsourcing specialized care costs while Covid-19 services revenue was still at a high level). High demand continues to support profitability, and H2 tends to be seasonally favorable, but short-term cost issues and Pohjola Hospital’s improvement pace create some uncertainty around H2 results. Meanwhile NIBD/EBITDA has been elevated, at least in the short-term, due to the various recent investments for which Pihlajalinna now looks to reap gains.
Long-term margin potential remains the big upside driver
We still don’t view the guidance challenging, although a positive revision may not arrive until around Q4; earnings growth should in any case continue next year. The 13x EV/EBIT valuation, on our FY ’23 estimates, is some 15% below peers’ while Pihlajalinna’s EBIT margin is likely to stay at least a third below a typical peer. Long-term upside potential hence continues to be meaningful. We revise our TP to EUR 12.5 (13.0) and retain our BUY rating.
Pihlajalinna’s Q2 results came in largely according to expectations. Top line growth continued strong and certain cost items remained high.
Pihlajalinna reports Q2 results on Fri, Aug 12. Q2 earnings will remain modest due to the integration process and a couple of other cost issues highlighted in the Q1 report.
Q1 results were better than expected despite many burdens
Pihlajalinna’s Q1 results delivered a positive surprise as both revenue and EBIT topped estimates. Organic growth amounted to 7%, driven by corporate customers where the Pohjola Hospital acquisition was an additional help to top line. The integration process went clearly better than expected over the first few months while outsourcing profitability also improved. Surgical operations performed better than the company expected in Q1. There were a few factors in Q1, in addition to the integration process, which limited profitability and are likely to do so at least to some extent also in Q2. High levels of sick leaves (+50%) due to the pandemic led to exceptionally high employee costs as Pihlajalinna had to resort to substitutes. Meanwhile Covid-19 services revenue continues to decline and is no more very profitable. Pihlajalinna is at the same time scaling up capacity in anticipation of near future demand, all of which means Q2 profitability will remain modest relative to long-term potential.
Focus rests on improvement over the course of H2
We make only marginal estimate revisions ahead of the report. We expect flat profitability q/q, at EUR 7.9m in terms of adj. EBITA, or down by EUR 1.0m y/y. We estimate top line growth to have increased to 19% y/y as Q2 was the first quarter in which Pohjola Hospital was included from the beginning. The report will update on the integration process; the acquisition reached positive results in two months, and progress has likely continued over the summer. The report may also provide an update on certain outsourcing restructuring negotiations. We do not view the FY ‘22 guidance for flat adj. EBITA challenging and, although there are many moving parts, we consider a guidance upgrade likely during or after Q3.
Valuation not demanding considering the margin upside
Pihlajalinna’s valuation is still not too challenging as the earnings multiples are well below peers’ (by some 20%) while profitability margins only begin to catch up. Peer multiples have however faced headwinds in the past three months and hence we adjust our TP to EUR 13 (14). We retain our BUY rating.
The Q1 results and notes on Pohjola Hospital support the view Pihlajalinna is advancing in terms of profitability.
Growth helped profitability top estimates
Q1 revenue grew 17% y/y to EUR 163m vs the EUR 157m/157m Evli/cons. estimates. Volume growth was even higher than the company expected, 7% on an organic basis. The beat was due to corporate customers, where Pohjola Hospital added EUR 9.4m, but also thanks to public sector, including Virta, where higher outsourcing pricing helped. Outsourcing profitability improved by EUR 1.5m y/y. High levels of sick leaves were a drag, and Covid-19 services are no more that profitable, but the volumes helped the EUR 5.9m adj. EBIT top the EUR 3.3m/3.5m Evli/cons. estimates. Pohjola Hospital’s integration has so far proceeded better than expected, but Pihlajalinna nevertheless retains its guidance for now as there remain a few uncertain factors.
Integration progress is ahead of plan in some ways
Pohjola Hospital posted positive results already two months after the acquisition, although not every unit is yet profitable. There’s still some uncertainty around how quickly the integrated whole can be turned to driving higher volumes, but positive development is likely to continue in H2. In this sense the guidance is on the conservative side, but it makes certain allowances for issues which may affect results during the following quarters. Sick leaves were high in Q1 due to infections, and this experience informs some caution. Certain negotiations related to Pohjola Hospital are yet to be completed, as is the case for outsourcing restructurings. Current labor market issues raise uncertainty, and in the case of Pihlajalinna the potential implications follow with a lag. Pihlajalinna is also scaling up capacity in advance to better meet future demand.
Guidance remains moderate for now
Our estimates for rest of the year are moderate, in line with the guidance, and there’s a good chance for an upgrade during or after Q3. Pihlajalinna’s margins have a lot of catching up to do with peers, but the Q1 results and comments on outlook suggest the company has established a firm footing. The 15.5x EV/EBIT valuation on our FY ’22 estimate isn’t high in the sector context, and we estimate the discount to grow and the multiple to drop to below 11x next year. We retain our EUR 14 TP and BUY rating.
Pihlajalinna’s Q1 revenue came in 4% above estimates and helped profitability land some EUR 3m higher than was expected.
Pihlajalinna reports Q1 results on May 5. The company’s Q4 results were negatively affected by higher outsourcing costs, and the situation will not much improve for Q1. Pohjola Hospital will also have remained in the red during the quarter. We do not expect changes to guidance.
We expect Q1 EBIT to have declined by EUR 3.4m y/y
Pihlajalinna’s organic growth was healthy throughout last year, including in Q4, as corporate and private customer demand bounced back from the pandemic lows. We estimate FY ‘22 organic growth to slow down to roughly half of the 13.5% rate seen last year. Q4 profitability saw a temporary setback as specialized care costs increased. We expect Pihlajalinna to receive compensation for these complete outsourcing costs later this year, but the negative effect was some EUR 2m in Q4 and we expect it to have been similarly significant in Q1 as well. Pohjola Hospital’s FY ’21 EBIT was ca. EUR -7m and hence Q1 EBIT will have to bear another meaningful burden. The Q1 figures will not fully reflect the acquisition as it was completed only by the beginning of February. We continue to expect EUR 156.6m revenue and EUR 3.3m EBIT for Q1.
Pohjola Hospital should involve no big surprises
Pihlajalinna previously indicated Covid-19 services revenue to decline this year. There was already some fading in Q4, and we expect this to have been the case also in Q1 even when the Finnish virus situation was by some measures the worst during the pandemic. We expect the Pohjola Hospital integration to have proceeded very much according to plan so far. Losses will still be there in Q2 but H2 could already show positive results. The EUR 5m in projected cost synergies are significant and the acquisition helps gain insurance customer volumes, which is an attractive segment.
Earnings and multiple expansion potential remain as before
Pihlajalinna’s peer multiples have remained largely unchanged in the past few months. The big picture on Pihlajalinna’s valuation is therefore intact: Pihlajalinna’s profitability now lags the (mostly) larger peers’ but should begin to catch up soon. Meanwhile the multiples for FY ’23-24 are some 30% below those of peers. We retain our EUR 14 TP and BUY rating.
Pihlajalinna’s Q4 EBIT was soft relative to estimates, but in our view the issue is temporary; Pihlajalinna continues its strategy execution with the acquisition of Pohjola Hospital.
We view the Q4 cost challenge as a temporary issue
Pihlajalinna’s top line grew at a 13% y/y rate. The EUR 155m figure was well in line with the EUR 156m/152m Evli/cons. estimates. Covid-19 services still amounted to a high EUR 10.1m, only a small q/q decline, but the level is set to fade this year. Q4 EBIT was hit by a spike in specialized care costs within complete outsourcing contracts, induced by Covid-19, and the effect amounted to some EUR 2m. The EUR 6.0m adj. EBIT therefore didn’t meet the EUR 9.2m/8.8m Evli/cons. estimates. Pihlajalinna has been negotiating for compensation for increased production costs before and expects to get favorable outcomes this year.
Growth and profitability targets set the bar high
Pohjola Hospital’s FY ’21 figures improved a bit, but EBIT was still EUR 7m red. Pihlajalinna sees EUR 5m in cost synergies and expects break-even during the year; H1 is still soft but H2 could already show results. The acquisition drives growth within private and insurance customers and thus helps margins as these areas are more profitable than public ones. Pihlajalinna revised its long-term financial targets accordingly: the new aim is above 9% EBITA margin and EUR 250m more revenue by the end of 2025 (compared to 2021), which in our view implies ca. 7.5% CAGR for the three years following the closing of the acquisition. Two thirds of the growth is to stem from corporate and private customers, segments where the acquisition is to prove useful. The profitability target can be seen as a small positive revision on the previous one; it will take some time for Pihlajalinna to reach that level, but we estimate by inferring from the guidance that Pihlajalinna could reach 7.5% EBITA margin already in H2’22. The company targets 4-6% margins within outsourcing, while other areas aim for levels comparable with those of Terveystalo.
Overall valuation picture hasn’t been altered
The acquisition limits profitability in H1’22, but Pihlajalinna is valued only around 6-8x EV/EBITDA and 12-18x EV/EBIT on our FY ’22-23 estimates. The multiples represent discounts to peers while our estimates remain moderate relative to long-term potential. We retain our EUR 14 TP and BUY rating.
Pihlajalinna’s Q4 revenue grew as expected but profitability fell short of estimates due to the increased costs within total outsourcing arrangements.
Pihlajalinna reports Q4 results on Fri, Feb 18. We make small positive revisions to our Q4 estimates as we expect Covid-19 services to have remained high due to Omicron, but we don’t expect Pihlajalinna to guide much more than flat EBIT for FY ’22 as M&A integration has barely begun.
We make small upward revisions to our Q4 estimates
Pihlajalinna’s EBIT continued to improve in Q3 despite an increase in outsourcing costs for which the company hadn’t yet received much compensation. The Finnish virus situation worsened again in Q4, and we believe Omicron has had a slight positive net effect on Q4 top line and EBIT; we previously expected Covid-19 services revenue to decline some in Q4 but we now estimate it to have remained pretty much flat q/q. We update our Q4 revenue estimate to EUR 156.4m (prev. EUR 153.9m) and thus expect y/y growth to have remained around 14%. We estimate y/y EBIT improvement to have steepened a bit in Q4 and now estimate Q4 EBIT at EUR 9.2m (prev. EUR 8.9m).
The acquisition will limit EBIT guidance in H1’22
Pihlajalinna has just completed the acquisition of Pohjola Hospital, a chain with a focus on orthopaedics and some EUR 60m in revenue, which make it a target of reasonable size and complementary fit for Pihlajalinna. The target turned a loss of EUR 10m in terms of EBIT in FY ’20 due to a dip in volumes; the losses might have narrowed somewhat already in FY ’21, however this hadn’t happened during the first 4 months of the year, but we expect losses or at least margin dilutive impact in H1’22. Margin accretion should occur in FY ’23 as insurance customers drive volumes and Pihlajalinna achieves cost synergies. We expect more specific updates to financial targets either in connection with the Q4 report or later during the spring. We continue to expect meaningful EBIT upside beyond this year and last, although we believe Pihlajalinna will not guide much more than flat or slightly improving EBIT for FY ’22 at such an early point when the target’s integration has only started.
Both margins and multiples remain on the modest side
Our view is unchanged as Pihlajalinna trades ca. 6.5-8.0x EV/EBITDA and 13.0-16.5x EV/EBIT on our FY ’21-22 estimates. The multiples are well below peers’ while margins remain at relatively modest levels. We retain our EUR 14 TP and BUY rating.
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.
Pihlajalinna’s Q3 report produced a top line beat while profitability was close to our estimates and above the consensus. The revenue surprise was attributable to public sector customers while Covid-19 services grew a lot y/y but also meaningfully q/q.
Pihlajalinna releases Q3 results on Nov 4. Our estimates remain intact for now. We continue to see good upside potential due to earnings growth and multiple expansion.
Solid Q2 gains represented a minor earnings beat
Pihlajalinna’s Q2 figures were pretty much in line with estimates. Top line grew 24% y/y from a soft comparison period. Private customer volumes recovered but remained below pre-pandemic levels. Private revenue fell 18% in FY ’20, but corporate and public sector revenues held up. Q2’20 was nonetheless a bit soft for the two as well and thus the corporate and public sector groups were able to post respective 31% and 18% y/y growth rates in Q2’21. The Q3 comparison base is higher but we still expect 10% y/y growth. Q2 profitability improved by some EUR 6m y/y and was a bit better than estimated. Q3 is seasonally the most profitable quarter due to low public sector costs and our EUR 10.6m EBIT estimate is ahead of the EUR 9.0m consensus.
EBIT potential to materialize in the short and long term
Covid-19 services added EUR 8.1m in Q2 revenue and the Q3 level should remain high (with some cost uncertainty), yet it will be of interest to hear to what extent Pihlajalinna expects the level to decline from Q4 onwards as the Finnish vaccination rate reaches 80%. The fading will cause its own top line headwind but the private volume normalization as well as the public side handling of queues, further stretched by the pandemic, should compensate. There’s more profitability potential going forward even with current volume levels. We reckon the Pohjola Hospital acquisition advances pretty much as planned, and thus should be completed by the end of the year or early next year at the latest. We have already added the EUR 60m revenue target to our FY ’22 estimates. The smallish target has been loss-making, but Pihlajalinna seemed confident with respect to achieving rapid results. We hence expect earnings accretion for next year as well.
Current valuation is by no means challenging
Pihlajalinna hasn’t completed significant acquisitions for a while; we estimate 13% growth for FY ’21. We see FY ’21 EBIT at EUR 31.9m and on this basis the multiples stand at ca. 8x EV/EBITDA and 16x EV/EBIT. Both profitability estimates and multiples remain well below those of peers: we continue to consider valuation attractive. We retain our EUR 13.5 TP and BUY rating.
Pihlajalinna’s Q2 served a small positive surprise relative to estimates. We are confident operating margin and multiple expansion potential enable solid long-term upside.
Small earnings beat as profitability continued to improve
Pihlajalinna’s Q2 revenue grew 24% to EUR 142.5m, compared to the EUR 140.7m/139.4m Evli/cons. estimates. There were no major surprises in terms of customer group revenues; we find the small revenue beat was due to the public sector. Private customer revenue recovered 44% from last year’s dip, but appointments remained 24% below 2019 levels, while within corporate customers visits were already close to pre-pandemic levels. Higher costs continued to limit outsourcing’s profitability y/y, but there was improvement q/q. Q2 operating margin excluding outsourcing improved by almost 700bps y/y. The combination of higher volumes and COVID-19 services drove profitability, but there’s still potential for further gains, depending on the type of service, even on current volume levels. Pihlajalinna reached EUR 6.5m adj. EBIT vs the EUR 5.6m/6.2m Evli/cons. estimates. The company retained its guidance.
We make only minor revisions to our estimates
Oral care is one practice area where profitability can be improved even without any increase in capacity utilization rates. COVID-19 services will remain high in Q3, while there’s some associated cost uncertainty. Overall clinical seasonality patterns should remain intact, but the current virus situation probably limits standard services’ volume potential for now. We now estimate FY ’21 growth at about 13% and adj. EBIT at EUR 31.9m.
Significant long-term upside potential is on the horizon
The Pohjola acquisition adds capacity and improves Pihlajalinna’s ability to compete with the two larger Finnish rivals. The focus will initially be on private customers, but public sector growth is also likely long-term. The target had by itself too limited scale to be profitable. Pihlajalinna will return with more details on the deal, but in our view the target seems a good fit and synergies should materialize already next year. Pihlajalinna remains valued 8x EV/EBITDA and 16x EV/EBIT on our FY ’21 estimates. These are below peers’, and Pihlajalinna also has more margin expansion potential considering its relatively modest profitability. Our new TP is EUR 13.5 (13.2); we retain our BUY rating.
Pihlajalinna’s revenue and profitability continued to improve and were slightly above estimates. The company reiterates its existing guidance.
Pihlajalinna reports Q2 results on Fri, Aug 13. Our FY ’21 estimates remain intact, but we note the latest announced acquisition which is set to be closed by the end of this year.
COVID-19 testing probably plays a big role also in Q3
Q1 top line grew 5% y/y, driven by public sector and corporate customers. COVID-19 testing contributed a major share of the revenue increase within the two groups. Meanwhile private customer revenue fell by 10% y/y, although COVID-19 testing had a small positive contribution there as well. COVID-19 testing added a total of EUR 8.2m in revenue, while overall net revenue growth was EUR 6.9m. We expect the tests to have played a similar important role in Q2 as the acute situation restrains other volumes. Finnish vaccination coverage was negligible in Q1 but improved a lot in Q2; testing levels might otherwise begin to fade in Q3 were it not for the fact that the virus situation has once again turned for the worse over the summer. We believe the testing business does not in any case reach abnormal margins and thus the back and forth with other services should have a neutral effect on Pihlajalinna’s profitability going forward.
On track towards higher profitability levels
The Q2 comparison figures are very low because the onset of the pandemic cut non-urgent healthcare demand a year ago. We estimate Q2 revenue to be up 23% y/y as there has been a rebound in private and corporate customer volumes. We expect EBIT to have gained by EUR 5.0m y/y to EUR 5.6m. For FY ’21 we estimate 12% y/y growth and some EUR 10m gain in EBIT.
Low multiples and profitability levels imply solid potential
Pihlajalinna is again active in M&A since the bid by Mehiläinen was curbed. The latest target is Pohjola Sairaala, for which Pihlajalinna pays EUR 32m in cash. The acquisition will add some EUR 60m in revenue next year and so the 0.5x EV/S valuation looks modest relative to Pihlajalinna’s 0.9x multiple. The target has been lately generating negative EBITDA and Pihlajalinna will provide more color on its development in the coming months. Pihlajalinna is valued 8x EV/EBITDA and 17x EV/EBIT on our FY ’21 estimates. The company has plenty more profitability potential and thus the multiples should decrease to 6.5x and 13x already next year. Both earnings multiples and margin levels are clearly below those of peers. We retain our EUR 13.2 TP and BUY rating.
Pihlajalinna - High hopes for H2 Equity Research Read full report here → Pihlajalinna’s Q1 result outpaced the expectations. Revenue increased by ~5% and adj. EBIT by ~59% y/y. We have slightly increased our 21E estimates and keep our rating “BUY” with TP of EUR 13.2 (13.0).
Q1 earnings outpaced expectations
Pihlajalinna’s Q1 result outpaced the expectations. Revenue increased by 5.2% y/y to EUR 140m which was in line with the Factset consensus estimates but above our EUR 137m. Revenue was once again supported by COVID-19 testing (revenue increase of EUR 8.2m). Testing volumes increased by 65% q/q. On the other hand, customer volumes of private clinics remained in a lower level. Revenue of corporate customer group increased by ~12% y/y while revenue of private customers was down by ~10% y/y. Revenue of public sector customer group increased by ~8% y/y. Adj. EBITDA amounted EUR 15.2m vs. EUR 14.4m/14.7m Evli/cons. and adj. EBIT was EUR 6.7m vs. EUR 5.6m/6.1m Evli/cons. EPS improved clearly to EUR 0.20 (Q1’20: EUR 0.06) vs. EUR 0.15/0.17 Evli/cons.
High hopes for H2’21
Pihlajalinna’s margin improvement in the private sector is right on track. The company has successfully renewed its sales strategy, and this was shown in Q1 figures. In the public sector, Pihlajalinna transitioned from the outsourcing market to the service sales market, in which the impact of the planned SOTE reform is low. The virus situation worsened towards the end of the first quarter and nearly all Pihlajalinna’s fitness centers were closed during April which will continue to hamper private customer segment in Q2. The situation has since improved and the vaccination coverage is gradually increasing. We expect the situation to normalize during H2’21 and the pent-up demand starting to release in late summer.
“BUY” with TP of EUR 13.2 (13.0)
Pihlajalinna reiterated its 2021 guidance and expects revenue and adj. EBIT to increase clearly compared to 2020. We have increased our 21E adj. EBIT expectation by ~7%. We expect 2021E revenue to grow by ~12% y/y and adj. EBIT of EUR 30.7m (5.4% margin). In 22E-23E, we expect adj EBIT margins of 5.6%. On our estimates, the company trades with 21E-22E EV/EBIT multiple of 16.8x and 13.5x which is ~15-20% discount compared to the peers. We keep “BUY” with TP of EUR 13.2 (13.0).
Pihlajalinna’s Q1 figures beat our estimates. Q1 revenue amounted EUR 140m (+5.2%) vs. EUR 137m/140m Evli/cons, while adj. EBIT landed at EUR 6.7m vs. EUR 5.6m/6.1m Evli/cons estimates. COVID-19 testing volumes continued to grow during Q1 but customer volumes of private clinics are still lagging behind.
Pihlajalinna reports its Q1 report on next week’s Friday, 7th of May. Despite the worsened COVID-19 situation during Q1, we expect fairly good quarterly figures. We keep our rating “BUY” with TP of EUR 13.
We expect revenue to increase by 3%
We expect Pihlajalinna to report relatively good Q1 result, with sales growth of 3% y/y (EUR 137m). We expect the COVID-19 testing is once again boosting sales. However, as the virus situation worsened towards the end of Q1 and new restrictions came into force, we expect private demand is still in lower levels than normally. As we saw at the end of last year, the company’s efficiency improvement actions have paid off and we expect Q1’21E profitability to improve from Q1’20. We foresee Q1 adj. EBIT of EUR 5.6m, resulting in adj. EBIT margin of 4.1% (Q1’20: 3.2%).
Market drivers offer new opportunities
Pihlajalinna held its CMD in late March where it highlighted its strategic priorities for the upcoming years as the market is changing in many ways. The company aims to continue to strengthen its already strong partnership with the public side and to engage in close cooperation with the future wellbeing services counties. In addition, Pihlajalinna will make renewals to its private services with new service concepts and digital innovation. Further, the company will continue to strengthen digitalization. The market drivers have remained unchanged (aging population, digital solutions, individuals’ interest in their own health etc.) offering many new opportunities to Pihlajalinna.
“BUY” with TP of EUR 13
We have included the acquisition of Työterveys Virta to our estimates from Q2’21E onwards. We expect 21E sales growth of ~11% (EUR 564m) and adj. EBIT of 28.8m (5.1% margin). We expect Pihlajalinna’s profitability to improve further in 22E-23E and adj. EBIT margin of 5.6% in both years. With our estimates, the company trades with 21E-22E EV/EBIT multiple of 17.8x and 13.4x which is 8-20% discount compared to the peers. We keep our rating “BUY” with TP of EUR 13.
Pihlajalinna held its CMD yesterday, 30th of March. The focus of the event was on the company’s strategic priorities and the future of the social and healthcare market. Financial targets remained unchanged. Thus, there were no changes in the big picture. We keep our rating “BUY” with TP of EUR 13.0 (12.0).
New opportunities in both, public and private side
Pihlajalinna highlighted its strategic priorities for the upcoming years as the market is changing in many ways (SOTE-reform, aging population etc.). The company aims to strengthen its already strong partnership with the public side and to engage in close cooperation with the future wellbeing services counties. In addition, Pihlajalinna will make renewals to its private services with new service concepts and digital innovation. Further, the company will continue to strengthen digitalization. The company has already had a strong focus on this and the importance of developing new digital solutions has only increased during the pandemic. The long-term financial targets (EBIT margin of over 7% and net debt/EBITDA under 3x) remained unchanged.
Big picture is unchanged
The main market drivers are unchanged as the Finnish population is rabidly aging which increases social and healthcare expenditures. Digitalization offers new opportunities and can improve efficiency. In addition, individuals’ interest in their own health is increasing which creates new opportunities in the preventive social and health care. The company seemed to be relatively positive about the future wellbeing services counties and cooperation opportunities stemming from these. However, Pihlajalinna has also strengthened its positioning e.g. in the occupational healthcare market and has widened its cooperation with insurance companies which reinforces our view that the company can grow in both, public and private side. Expanding the service network should also provide support for future partnerships.
“BUY” with TP of EUR 13 (12)
We have kept our estimates intact and expect 21E revenue growth of ~10% and adj. EBIT of EUR 27.3m (adj. EBIT margin of 4.9%). In 22E and 23E, we expect revenue growth of 5% and 3%. We expect profitability improvement to continue and expect adj. EBIT margin of 5.4% in 22E and 5.6% in 23E. With our estimates, the company trades with 21E-22E EV/EBIT multiple of 16.3x and 13.8x which is 14% discount compared to the peers. We keep our rating “BUY” with new TP of EUR 13 (12).
Pihlajalinna’s Q4 result and dividend proposal outpaced the expectations. We have increased our 21E estimates and expect revenue growth of 10% and adj. EBIT margin of 4.9%. We upgrade to “BUY” (“HOLD”) with TP of EUR 12 (10.5).
Positive surprise with Q4 result
Pihlajalinna’s Q4 result outpaced the expectations. Revenue increased by 2.6% y/y to EUR 137.2m (135.2m/135.5m Evli/cons). Revenue growth was driven by increased COVID-19 testing volumes which increased by 67% compared to the previous quarter. At the same time, customer volumes in private clinics locations were 10% lower compared to the comparison period. Adj. EBIT improved by ~31% to EUR 7.3m (5.3m/4.8m Evli/cons). 2020 dividend proposal of EUR 0.20 beat also clearly the expectations (0.12/0.09 Evli/cons).
Revenue streams from several sources
Pihlajalinna’s measures taken towards improved profitability have worked and we expect the company is able to increase its profitability further. Pihlajalinna has growth opportunities in several markets and the company has strengthened its positioning e.g. in the occupational healthcare market (e.g. Työterveys Virta). The company has expanded its operations in the public side as the services of Selkämeren Terveys Oy began in the beginning of the year. The Huhtasuo health center outsourcing started in December. Additionally, Pihlajalinna won a significant proportion of a competitive bidding process for the outpatient clinic, surgery, and inpatient services of the Northern Ostrobothnia Hospital District in early 2021.
“BUY” (“HOLD”) with TP of EUR 12 (10.5)
Pihlajalinna expects 2021 revenue to increase clearly and adj. EBIT to improve clearly compared to 2020. The company will introduce its updated strategy soon and we expect to get more color on that in connection with the CMD which takes place in late March. We expect 21E revenue growth of ~10% (EUR 559m) and adj. EBIT margin of 4.9% (EUR 27.3m). On our estimates, the company trades with 21E-22E EV/EBIT multiple of 15.6x and 13.2x which translates into 12-13% discount compared to the peers. We upgrade to “BUY” (“HOLD”) with TP of EUR 12 (10.5).
Pihlajalinna’s Q4 result outpaced the expectations. Q4 revenue amounted EUR 137.2m (+2.6%) vs. EUR 135.3m/135.5m Evli/cons, while adj. EBIT landed at EUR 7.3m vs. EUR 5.3m/4.8m Evli/cons estimates. Dividend proposal is EUR 0.20 vs. EUR 0.12/0.09 Evli/cons. 2021 revenue is expected to increase clearly and adj. EBIT is expected to improve clearly compared to 2020.
Pihlajalinna reports its Q4 result on this week’s Friday, 19th of February. We have made only small adjustments to our estimates and keep our rating “HOLD” with TP of EUR 10.5 (9.5).
Expecting ~1% revenue growth in Q4
Despite the COVID-19 situation worsened towards the end of the year we expect a fairly good Q4 result. We expect Pihlajalinna’s Q4E revenue to grow by ~1% y/y to EUR 135m (cons. EUR 136m), supported by increased volumes of COVID-19 testing. On the other hand, as the virus situation has prolonged, we expect the demand of private services (e.g. fitness centers) is still lagging behind. We expect adj. EBIT of EUR 5.3m (cons. EUR 4.9m). We expect 20E dividend of EUR 0.12 (cons. EUR 0.09).
The virus is still hampering private services
The outlook of many private services e.g. fitness centers remains weak as the pandemic shows no signs of abating and the vaccinations haven’t started as quickly as first anticipated due to the delays in the vaccine supply. On the other hand, we expect the COVID-19 testing to continue strong, supporting revenue. The company started negotiations for the purchase of all shares in Työterveys Virta at the end of 2020 which gives Pihlajalinna almost 30 % share of the occupational healthcare market in the Oulu region. Revenue of Työterveys Virta in 2019 was approx. EUR 13.6m. The Due Diligence review has been completed, and the procurement has now advanced to the contract phase and approval of bills of sale. The total price of the shares with cash reserve is EUR 17.6m (meaning EV/Sales multiple of 1.3x). The acquisition is not yet included to our estimates.
“HOLD” with TP of EUR 10.50 (9.5)
We expect FY20E revenue of EUR 507m (-2.3% y/y) and adj. EBIT of EUR 18.8m. On our estimates, the company trades with 20E-21E EV/EBIT multiple of 23.3x and 15.9x. Which is 1-12% discount compared to the peers. We keep our rating “HOLD” with TP of EUR 10.5 (9.5).
Pihlajalinna’s Q3 result was in line with our expectations. Revenue increased by 1% y/y to EUR 124m. Adj. EBIT was EUR 8.7m. Guidance for 20E was not given due to the uncertainties caused by the pandemic. We keep our rating “HOLD” with TP of EUR 9.5 intact.
Result in line with our expectations
Pihlajalinna’s Q3 result was in line with our expectations. Revenue increased by 1% y/y to EUR 123.9m vs. EUR 125.0m/122.2m Evli/cons. Revenue was boosted by the COVID-19 testing which increased revenue by EUR 3.4m. The recovery of the private demand has been weaker than what we anticipated. Among private customers, the demand for private clinic services declined by 6% and for dental care services by 8%. The fitness centers have lost ~6000 member customers due to the coronavirus restrictions. Adj. EBITDA was EUR 17.2m vs EUR 17.3m/16.0m Evli/cons and adj. EBIT totaled EUR 8.7m vs. EUR 8.4m/7.2m Evli/cons.
Private demand hampered by the prolonging virus situation
Even though the pent-up demand has started to release, the private demand is still lagging behind. We expect the demand to continue to normalize during the final quarter, but the prolonging pandemic situation is still likely to have a negative impact on demand. Especially the outlook of fitness centers remains weaker due to the restrictions. At the same time, the COVID-19 testing has grown significantly which should benefit Pihlajalinna in the future as well. The company is targeting to strengthen its occupational healthcare services and has started negotiations for the purchase of all shares in Työterveys Virta. The transaction would give Pihlajalinna almost 30% share of the occupational healthcare market in the Oulu region and it would be strategically very important for the company.
“HOLD” with TP of EUR 9.5 intact
The FCCA has proposed the market court to prohibit the merger between Mehiläinen and Pihlajalinna. The tender offer will run until 20th of Nov. We have therefore returned to see Pihlajalinna as an independent service provider also in the future. We have slightly decreased our estimates and expect 20E revenue of EUR 507m (-2.3% y/y) and adj. EBIT of EUR 18.9m. On our estimates, the company trades at 20E-21E EV/EBITDA multiple of 7.9x and 6.4x, which translates into 17-23% discount compared the peers. We keep our rating “HOLD” and TP of EUR 9.5.
Pihlajalinna’s Q3 result was broadly in line with our expectations. Q3 revenue amounted to EUR 123.9m vs. EUR 125m/122.2m Evli/cons, while adj. EBIT landed at EUR 8.7m vs. EUR 8.4m/7.2m Evli/cons estimates. EPS was EUR 0.20 vs. our EUR 0.20.
Pihlajalinna reports its Q3 result on next Wednesday, 4th of November. As the coronavirus situation is prolonging, we have slightly cut our estimates. We keep our rating “HOLD” with TP of EUR 9.5 (11.0) ahead of the result.
Expecting revenue growth of 1.8% y/y in Q3E
The coronavirus situation eased in the beginning of the summer but in the late summer the infection waves started to increase again, and the situation has gotten worse during the autumn. Therefore, we have slightly cut our estimates. We expect that the pent-up demand has continued to release during Q3 but on the other hand people have spent more time at home and in summer houses which might have an impact on demand. We expect Q3E revenue to grow by 1.8% y/y to EUR 125.0m (prev. estimate of EUR 127.5m) and adj. EBIT of EUR 8.4m (prev. estimate of EUR 9.9m).
Returned to see Pihlajalinna as an independent company
The Finnish Competition and Consumer Authority (FCCA) has proposed the market court to prohibit the merger between Mehiläinen and Pihlajalinna. According to the FCCA, the merger would significantly impede effective competition in the Finnish health services market as there would be only two nationwide healthcare companies (Mehiläinen and Terveystalo) in the market post-merger. Thus, we see that the likelihood of the acquisition being completed has decreased significantly and therefore we have returned to see Pihlajalinna as an independent service provider also in the future. We also note that the political uncertainties in Finland have increased.
“HOLD” with TP of EUR 9.5 (11.0)
We have cut our 20E-21E revenue expectation by ~1% and our adj. EBIT expectation by ~10-11%. We expect 20E revenue to decline by 1.2% y/y (EUR 512m) and adj. EBIT of EUR 19.8m. On our estimates, the company trades at 20E-21E EV/EBIT multiple of 20.3x and 13.2x, which translates into 1-20% discount compared to the peers. We keep our rating “HOLD” with TP of EUR 9.5 (11.0) ahead of the Q3 result.
The FCCA has proposed the market court to prohibit the merger between Mehiläinen and Pihlajalinna. We now see the likelihood of the transaction being completed significantly lower. The political landscape is also changing. We keep our rating “HOLD” with new TP of EUR 11.0 (16.0).
FCCA proposes to prohibit the merger
The Finnish Competition and Consumer Authority (FCCA) has proposed the market court to prohibit the merger between Mehiläinen and Pihlajalinna. According to the FCCA, the merger would significantly impede effective competition in the Finnish health services market as there would be only two nationwide healthcare companies (Mehiläinen and Terveystalo) in the market post-merger. Hence, the Finnish healthcare market would become even more concentrated post-merger and the merger would create competition concerns and the proposed remedies are not sufficient to address the identified competition concerns (Mehiläinen submitted two remedies proposals). According to the FCCA, the merger is also likely to lead to price increases. The combined market share of the companies would have been ~7% of the total healthcare and social services market. The market court has to issue its decision within three months (latest on 29th of December).
The probability of the acquisition being completed has dropped
The result of the investigation came as a surprise to the parties involved and to us as well. It is possible that the FCCA’s methodology to assess the market size has varied from the methodology used by the companies (e.g. public vs. private sector). Anyhow, we see that the likelihood of the acquisition being completed has decreased significantly thus we return to see Pihlajalinna as an independent service provider also in the future. During the process, Pihlajalinna has continued to develop its business as usual. The company has for instance developed its digital services and other medical services. Additionally, the company has a strong background of cooperating with municipalities. Due to the economic difficulties, the public sector has seeked more efficient ways to produce effective services (e.g. by outsourcings) which has benefited the private sector. The political interests have however shifted more towards the public side meaning that the landscape has become more negative towards private social and healthcare service providers.
“HOLD” with TP of EUR 11.0
We have not made changes to our estimates but we see that the probability of transaction being completed is significantly lower. On our estimates, the company trades at 20E-21E EV/EBIT multiple of 19.5x and 12.9x which translates into 15-30% discount compared to the peers. We keep our rating “HOLD” with a new TP of EUR 11.0 (16.0).
Pihlajalinna’s Q2 result was close to expectations. Revenue decreased by 11.6% y/y and was EUR 114.7m while adj. EBIT totaled EUR 0.6m. The tender offer by Mehiläinen is being under review of the FCCA and if approved, the process is expected to be completed during Q3. We keep our rating “HOLD” with TP of EUR 16.0.
The pandemic hampered especially non-urgent healthcare
Pihlajalinna’s April-June revenue of EUR 114.7m (-11.6% y/y) was slightly above our expectation of EUR 112.1m. Adj. EBITDA was EUR 9.0m vs. our EUR 9.1m and adj. EBIT was EUR 0.6m vs. our EUR 0.2m. Complete outsourcings and other fixed priced invoicing supported the company throughout Q2 (profitability of these remains relatively stable despite of the demand situation). The situation didn’t also have significant impacts on the demand of housing services for elderly, recruitment services, public surgical operations or fertility treatments. Customer flows and demand decreased especially in private clinics and dental clinics. Revenue of Forever-fitness centers declined by over 80 percent y/y, resulting from the temporarily closure of the centers.
Releasing pent-up demand
According to the company, the biggest drop in demand is now behind and as the pent-up demand has started to release, the customer flows in private clinics, occupational healthcare services and dental care services have recovered relatively well and the demand is closer to a normal situation. As the restrictions impacted the most on the demand of non-urgent healthcare services, there are bottlenecks in the treatment queues especially on the public side. This could potentially further increase the customer flows of the private sector. However, the increasing number of new coronavirus infections is indicating a new wave, which increases uncertainties and makes the visibility of H2 blurry.
“HOLD” with TP of EUR 16.0
The tender offer by Mehiläinen is currently being under review of the FCCA (phase two investigation). The deadline for the investigation is 27th of August (plus possible extension period). Based on the current information, if the tender offer is approved, the process is expected to be completed during Q3. We have only made minor adjustment to our estimates after the Q2 result. We expect 20E revenue of EUR 517m (-0.3% y/y) and adj. EBIT of EUR 22.3m. We keep our TP at the tender offer price of EUR 16.0 and retain our rating “HOLD”.
Pihlajalinna’s Q2 result was somewhat in line with our expectations. Q2 revenue amounted to EUR 114.7m vs. EUR 112.1m/119.1m Evli/cons, while adj. EBIT landed at EUR 0.6m vs. EUR 0.2m/1.8m Evli/cons estimates. EPS was EUR -0.03 vs. our EUR -0.03.
Pihlajalinna reports its Q2’20E result on this week’s Friday, 14th of August. We expect the COVID-19 and the movement restrictions have continued to hamper Pihlajalinna’s business especially in April but the situation should have started to normalize. The tender offer by Mehiläinen is still being under review of the FCCA. We keep our rating “HOLD” and TP of EUR 16.0 intact.
Expecting weak demand in non-urgent healthcare
Pihlajalinna’s operations were heavily impacted by the emergency laws that came into force in mid-March. We expect to see the most negative impacts in April as especially the demand of non-urgent healthcare and oral healthcare started rapidly to decrease in late March. The management indicated earlier in H1 that the complete outsourcings and other fixed-priced invoicing have supported the company during the unexceptional times as the profitability of these kinds of contracts normally remains stable, even during times of lower demand. The demand of housing services for the elderly and recruitment services should also remain relatively stable.
Still waiting for the FCCA’s decision
We expect the customer flows have started slowly to recover. However, we expect to see better improvement later in H2’E as the pent-up demand of social services and non-urgent healthcare should normalize after the restrictions were lifted. The visibility of H2E remains blurry and the demand is depended on the pandemic situation. The tender offer by Mehiläinen is still being under review of the FCCA and the second phase investigation should be ready by the end of August. If approved, the process is expected to be completed during Q3’20E.
"HOLD” with TP of EUR 16.0
We have only made minor adjustments to our estimates. We expect Q2’20E revenue of EUR 112.1m (-13.6% y/y) and adj. EBIT of EUR 0.2m (EUR 2.1m in Q2’19). We expect 20E revenue of EUR 517m (-0.3% y/y) and adj. EBIT of EUR 22.3m (6.7% y/y). We keep our rating “HOLD” and TP of EUR 16.0 intact.
Pihlajalinna’s Q1 revenue amounted to EUR 133m (+0.4% y/y) vs. our EUR 135m. Adj. EBIT was EUR 4.2m vs. our EUR 5.2m. The tender offer by Mehiläinen is currently being under review of the FCCA and the final decision should be ready at the end of Q2 or latest in Q3. We keep our TP of EUR 16.0 and downgrade our rating to “HOLD” (“BUY”).
Non-urgent and oral healthcare took hit from COVID-19
Pihlajalinna’s Jan-March result was rather good even though it slightly missed our expectations. Q1 revenue increased by 0.4% y/y to EUR 133m (EUR 135m/133m Evli/cons). Adj. EBIT landed at EUR 4.2m (EUR 5.2m/4.4m Evli/cons). According to the management, revenue and profitability developed as expected during the first months of the year but the coronavirus and the emergency laws that came into force in mid-March had a negative impact on the company’s business. Negative impacts were especially seen on the demand of non-urgent healthcare and oral healthcare. Fitness centers were also closed at the end of March. The decreased customer flows reduced the invoicing by approx. EUR 3.3m.
Demand should start slowly to recover
We expect the coronavirus had the most negative impacts on Pihlajalinna’s business in April due to the movement restrictions but the demand should start slowly to recover as the government is starting to ease the restrictions. Also, the management of Pihlajalinna indicated that some signs of recovering demand have already been seen. During these unexceptional times, complete outsourcings and other fixed-price invoicing have supported the company as the profitability of these kinds of contracts normally remains stable, even during times of lower demand. Also, the coronavirus should not have significant impacts on the demand of housing services for the elderly or recruitment services. Thus, more than half of the business operations are expected to remain stable during this time. The outlook for H2 still remains blurry as the visibility around the situation is very weak. Therefore, guidance for 20E was not given at this point.
“HOLD” (“BUY”) with TP of EUR 16
We have cut our 20E adj. EBIT estimate by ~20% while making only minor adjustments to our revenue expectation. We expect 20E revenue of EUR 517m (-0.3% y/y) and adj. EBIT of EUR 21.6m (3% y/y). The tender offer by Mehiläinen is currently being under review of the FCCA (in the phase two investigation). The investigation process should be completed at the end of Q2 or latest during Q3. We keep our TP at the tender offer price of EUR 16 and downgrade our rating to “HOLD” (prev. “BUY”).
Pihlajalinna’s Q1 result was slightly below our expectations but in line with consensus. Q1 revenue amounted to EUR 133m vs. EUR 135m/133m Evli/cons, while adj. EBIT landed at EUR 4.2m vs. EUR 5.2m/4.4m Evli/cons estimates. Guidance for 20E was not given at this point.
Pihlajalinna withdrew its 20E guidance as it is challenging to assess and predict the total impacts of the coronavirus. Half of the operations are expected to remain stable but the demand for non-urgent health care and oral health services has declined. We expect 20E revenue to remain at the same level as in ’19 (EUR 519m) and adj. EBIT of EUR 27m (28% y/y). However, there are significant uncertainties with our short-term estimates. Our rating is now “BUY” (“HOLD”) with TP of EUR 16.
20E guidance temporarily withdrawn
Pihlajalinna withdrew its guidance for 20E as it is challenging to predict the total financial and operational impacts caused by COVID-19 and the given emergency laws. A new guidance will be given at a later point, when the total impacts can be more reliably assessed. According to the company, during the first months of the year, turnover and profitability have developed as expected. Based on the previous guidance given in February, Pihlajalinna expected turnover and adj. EBIT to improve from the previous year.
Non-urgent and oral health services hampered by COVID-19
According to the company, comprehensive outsourcing in the context of the social welfare and healthcare reform and other fixed-price invoicing is related to a steady recognition of income over time. Profitability of these kinds of contracts normally remains stable, even during periods of low demand. Demand for housing services for the elderly and recruitment services is not expected be affected by the situation. Therefore, more than half of the business operations are expected to remain stable. Also, demand for remote services has increased. Pihlajalinna’s fitness centers have been temporarily closed since late March and the demand for non-urgent healthcare and oral health services has decreased due to the coronavirus. We expect the demand for these services to increase after the situation, which should partly compensate this period of low demand.
“BUY” (“HOLD”) with TP of EUR 16
We have decreased our 20E turnover expectation by ~3% and adj. EBIT expectation by ~24%. We now expect 20E turnover to remain at the same level as in ‘19 (EUR 519m) and adj. EBIT of EUR 27m (28% y/y). Adj. EBIT is expected to improve due to the cost savings resulting from the efficiency improvement program that was launched last summer. However, we note that there are significant uncertainties especially with our short-term estimates. The tender offer by Mehiläinen is currently being under review of the FCCA. As expected, the FCCA initiated the phase two investigation, meaning that the process will be completed at the end of Q2’20E or latest during Q3’20E. We keep our TP at the tender offer price of EUR 16 and upgrade our rating to “BUY” (“HOLD”).
Pihlajalinna’s Q4 revenue was as expected at EUR 133.8m (Evli 133.6m) but profitability was weighed down by increased costs. Q4 adj. EBIT amounted to EUR 5.6m (Evli 7.8m). The tender offer by Mehiläinen is currently being reviewed in FCCA and the process is expected to be completed at the end of Q2’20 or latest during Q3’20. For ‘20E we expect a clear improvement in profitability. We keep our rating “HOLD” with TP of EUR 16.
Q4 revenue in line – adj. EBIT missed expectations
Pihlajalinna’s Q4 revenue of EUR 133.8m (5.4% y/y) was as anticipated (Evli/cons EUR 133.6m/134.4m) but adj. EBIT of EUR 5.6m missed the expectations (Evli/cons EUR 7.8m/8.5m). Profitability was hampered by increased costs related to public specialized care which were concentrated towards the end of the year. Volume and profitability developed favorably in sales to insurance companies (revenue up by 18.1% y/y) but also in occupational healthcare, following the acquisition of Terveyspalvelu Verso. Due to the tender offer by Mehiläinen, no dividend for ’19 is proposed (Evli/cons EUR 0.15/0.15).
Expecting a turnaround in profitability
In ’19, the performance especially in occupational healthcare was good as revenue in the segment grew more than 25% y/y. Profitability was positively impacted by increased share of fixed price services and development of operational models. We expect further growth in occupational healthcare but also in sales to insurance companies, of which, the latest agreement with Pohjola Insurance is an example. Due to the uncertainties around the social and healthcare reform, municipalities have become more active on outsourcing projects. In late ’19, Kristiinankaupunki and Pihlajalinna agreed on a partial outsourcing deal, starting in ‘21E, with total value of EUR ~90m. The contract is at least for 15 years. For ‘20E we don’t expect any new outsourcings to occur. We expect profitability (adj. EBIT) to improve by 68% y/y in ’20E and by 7% y/y in ‘21E due to the cost savings resulting from the efficiency improvement program that was launched last summer. We expect ’20E-‘21E revenue growth of ~3-4%.
“HOLD” with TP of EUR 16 intact
The tender offer by Mehiläinen is currently being under review of FCCA. The first phase investigation will be completed by mid-March though it is highly likely that FCCA will initiate continued phase two proceedings after phase one, meaning that the process is likely to be completed at the end of Q2’20E or latest during Q3’20E. According to Pihlajalinna’s guidance, ‘20E revenue and adj. EBIT are expected to increase from ‘19. We expect ‘20E revenue of EUR 538m (3.8% y/y) and adj. EBIT of EUR 35.1 (68% y/y). Our target price is in line with the tender offer price of EUR 16. We keep our rating “HOLD”.
Pihlajalinna’s Q4’19 revenue amounted to EUR 133.8m vs. EUR 133.6m/134.4m Evli/cons, while adj. EBIT landed at EUR 5.6m vs. EUR 7.8m/8.5m Evli/cons estimates. Organic growth increased by 3.1% y/y. 20E consolidated revenue is expected to increase from the 2019 level. Adjusted EBIT is expected to increase compared to 2019.
• Q4 revenue was EUR 133.8m vs. EUR 133.6m/134.4m Evli/cons estimates. Revenue grew by 5.4% y/y. Organic growth was 3.1% y/y.
• Q4 adj. EBITDA was EUR 14.4m (10.8% margin) vs. EUR 16.7m/17.5m Evli/cons estimates. Profitability was affected by the costs of public specialized care that were concentrated towards the end of the year. Personnel expenses were also increased by stricter requirements imposed by the authorities.
• Q4 adj. EBIT was EUR 5.6m (4.2% margin) vs. EUR 7.8m/8.5m (5.8%/6.3%) Evli/cons estimates.
• Q4 EPS was EUR 0.16 vs. EUR 0.23/0.21 Evli/cons.
• Due to the Mehiläinen’s tender offer, no dividend for ’19 is proposed (EUR 0.15/0.15 Evli/cons).
• Guidance for 20E: consolidated revenue is expected to increase from the 2019 level. Adjusted EBIT is expected to increase compared to 2019
Pihlajalinna reports its Q4 result on 14th of Feb. We expect Q4 sales of EUR 133.6m (5.2% y/y) and adj. EBIT of EUR 7.8m, resulting in adj. EBIT margin of 5.8%. We have kept our estimates intact ahead of Q4 and retain our rating “HOLD” with TP of EUR 16.0.
Expecting further profitability improvements in Q4
Pihlajalinna implemented its efficiency improvement program last summer, targeting annual cost savings of EUR 17m and indicated that already some EUR 5m savings could be seen in H2’19. In Q3, we saw improvement in profitability as adj. EBIT rose by ~60% y/y. Expansion particularly into regional capitals continued in ’19 as multiple new clinics were opened, boosting revenue growth. We expect Q4 revenue growth of 5.2% y/y (133.6m), driven by new clinics and adj. EBIT of EUR 7.8m (~13% y/y), resulting in adj. EBIT margin of 5.8%.
Increased ownership in municipal joint-stock companies
In late Q4, Pihlajalinna increased its ownership in its municipal joint-stock companies Kuusiolinna Terveys and Mäntänvuoren Terveys. After the transactions, Pihlajalinna’s ownership in Kuusiolinna Terveys is 89% (51%) and in Mäntänvuoren Terveys 91% (81%). Pihlajalinna pays EUR 16.3m for the shares of Kuusiolinna Terveys and EUR 2m for the shares of Mäntänvuoren Terveys. The transactions have no impact on our revenue or profitability estimates. In our view, the increase in ownership is positive as the joint-stock companies represent a significant part of Pihlajalinna’s revenue and profit (the combined revenue of Kuusiolinna Terveys and Mäntänvuoren Terveys represented some 29% of total ’18 revenue) and due to the transactions, the share of non-controlling interest decreases, increasing earnings attributable to the owners of the parent company. We expect ‘20E revenue growth of 3.3% (536m), driven by new clinic openings and adj. EBIT improvement of ~53% (EUR 35.1m). Mehiläinen’s cash tender offer of Pihlajalinna’s shares is currently ongoing and being reviewed in FCCA.
“HOLD” with TP of EUR 16 intact
With our estimates intact, we expect 19E revenue of EUR 518.5m (6.3% y/y) and adj. EBIT of 23.0 (~60% y/y), resulting in adj. EBIT margin of 4.4%. We expect a dividend of EUR 0.15 (cons. EUR 0.14) for ’19. Our share price is in line with the tender offer price of EUR 16.0. We keep our rating “HOLD” with TP of EUR 16.
Pihlajalinna’s Q3 revenue was in line with expectations but profitability was better than expected. Mehiläinen made a cash tender offer of all the shares of Pihlajalinna with the offer price of EUR 16 per share. We see the offer likely to be approved by the shareholders. With the TP of EUR 16 (12) our rating is now “HOLD”.
Efficiency improvements already shown in Q3
Pihlajalinna delivered good Q3 result. Revenue grew by 5.5% (of which 3.7% organic growth) and was in line with estimates at EUR 122.7m (EUR 123.0m/121.5m Evli/consensus). The company’s adj. EBITDA beat expectations and was at EUR 17.4m (21.9% y/y) vs. our EUR 15.7m. Profitability improved mainly as a result of the efficiency improvement program but was also supported by increased revenue growth.
Mehiläinen plans to acquire Pihlajalinna
Mehiläinen has made a cash tender offer of all the shares of Pihlajalinna with the offer price of EUR 16 per share which values Pihlajalinna’s total equity at EUR ~362m. The offer price translates into a premium of ~46% compared to Monday’s closing price of EUR 10.96. The tender offer is unanimously recommended by the non-conflicted members of the board of directors of Pihlajalinna. We see the offer likely to be approved by the shareholders as the largest shareholders have already accepted the offer (~63% of shares). The combined revenue would represent some 23% of the total private social and healthcare market and in certain sectors the market shares might become too large, harming the competition. At the same time Terveystalo’s acquisition of Attendo’s Finnish branch in 2018 supports the approval. The offer is subject to the approval of the Finnish Competition and Consumer Authority (FCCA).
“HOLD” with TP of EUR 16.0 (12.0)
After the good Q3 result, we have fine-tuned our 19E-21E estimates. We expect 2019E sales to grow by 6.3% to EUR 518.5m and adj. EBIT of EUR 23.0 resulting in adj. EBIT margin of 4.4% (2018: 3.0%) The offer price of EUR 16.0 translates into EV/EBITDA multiple of 9.6x and 7.7x on our 19E-20E estimates which is 5-10% discount compared to the peer group. We have increased our TP to match the offer price of EUR 16.0 (prev. EUR 12.0) and our rating is now “HOLD”.
Mehiläinen and Pihlajalinna have on 5th of November 2019 entered into a combination agreement pursuant to which Mehiläinen will make a voluntary recommended public cash tender offer for all issued and outstanding shares in Pihlajalinna. The offer price is EUR 16.00 in cash for each issued and outstanding share in Pihlajalinna, valuing the company’s total equity at EUR ~362m. The offer price represents a premium of ~46%. The non-conflicted members of the board of directors of Pihlajalinna have unanimously decided to recommend that the shareholders of Pihlajalinna accept the tender offer.
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.
Pihlajalinna’s Q2 result fell short of expectations. The company faces profitability issues in many of its units and has launched an efficiency improvement program that aims at annual cost savings of EUR 17m. We keep our rating “BUY” with TP of EUR 12 (prev. EUR 13).
Q2 earnings weaker than expected
Pihlajalinna’s Q2 earnings fell short of expectations. The company’s revenue was EUR 130m vs. EUR 134m/132m Evli/cons. Revenue grew by 3.5% of which organic growth was 1.5% y/y. Adjusted EBITDA was EUR 10.8m (8.3% margin) vs. EUR 13.3m/13.2m (9.9%/9.9%) Evli/cons. EBITDA was negatively impacted by unequal resourcing of units and general salary increases. Adj. EBIT was clearly below expectations at EUR 2.1m vs. EUR 4.8m/4.6m Evli/cons. In a group level, EBIT was negative in April and May but improved in June. Profitability improved in the Forever fitness center chain and in public specialized care but decreased in outsourced primary care and social care services, private clinics, surgical operations and dental care services. Seasonality impacted the Q2 result as well.
Strong actions to improve profitability
Pihlajalinna’s long-term target is to increase its EBIT margin to over 7%, which so far has seemed rather distant. The company has faced efficiency problems especially with the new clinics which has impacted negatively on the company’s profitability. The company indicated that it has several loss-making clinics. In order to improve its profitability, Pihlajalinna launched an efficiency improvement program 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. The focus is on operational management. The company estimated that the efficiency improvement program will help to reduce costs in H2’19 by approximately EUR 5m. The program involves a non-recurring item of approximately EUR 8m, which will be allocated to Q3’19 as an adjustment item. Despite of the weak Q2 result the company reiterated its guidance for 2019E and expects revenue to increase from 2018 and EBIT clearly to improve from last year.
High activity in M&A and partnerships
Pihlajalinna has been active in M&A and partnerships in H1’19 but the company has also been able to grow organically. During Q2, the company released a letter of intent on co-operation with Pirkanmaa Hospital District. The partnership seeks to design new and innovative service models with a strong customer focus. The company has also agreed on pilot co-operation with Pohjola Vakuutus. During the review period, Pihlajalinna has further expanded its occupational healthcare network by acquiring Raisio’s Aurinkoristeys occupational healthcare units and the Kouvola Työterveys occupational healthcare unit. Pihlajalinna also opened an occupational healthcare center to Rovaniemi in August. In H2’19, the company seeks to improve its services in its healthcare centers but also in mobile. Improved remote services should further support the company’s efficiency. Pihlajalinna sees that the collapse of social and healthcare service reform has activated municipalities and the company has indicated that it has new possible contracts in the pipeline.
We retain “Buy” with TP of EUR 12 (prev. EUR 13)
As a result of the weak Q2, we have decreased our 2019E estimates. We now expect 2019E revenue of EUR 516m (prev. EUR 525m). We expect adj. EBIT of EUR 20m (prev. EUR 24m) resulting in EBIT% of 3.9% (prev. 4.6%). Despite of the expected EBIT improvement (42.8% y/y) from 2018, 2019E earnings remain uncertain. If the planned efficiency improvements succeed in 2020E we expect a turnaround in profitability and the company to move towards its EBIT% target of 7%. On our estimates, Pihlajalinna trades at 2019E-2020E EV/EBITDA multiple of 7.5x and 6.1x, which translates into ~27% discount compared to the peer group. We keep our rating “Buy” with new TP of EUR 12 (prev. EUR 13).
In Q2’19, Pihlajalinna’s revenue amounted to EUR 129.7m vs. EUR 134.0m/132.4m Evli/cons estimates, while adj. EBIT landed at EUR 2.1m vs. EUR 4.8m/4.6m Evli/cons estimates. Organic growth increased by 1.5% y/y. The company reiterated its 2019E guidance.
Pihlajalinna reports its Q2 earnings on next week’s Thursday, August 15th. During Q2, the company has actively expanded its service network across the country. The company also announced the launch of an efficiency improvement program in mid-June. We keep our rating “BUY” with TP of EUR 13.0 ahead of Q2.
Expanding occupational healthcare network continues
Pihlajalinna has grown fast in H1’19 through M&A and expanding the company’s service network. The company indicated earlier that it sees opportunities in expanding its occupational healthcare network as municipalities and other public sector entities are interested in divesting the occupational healthcare providers they currently own. As a result of that, Pihlajalinna has expanded its occupational healthcare network actively in Q2’19 as the company announced the acquisitions of Raisio’s occupational healthcare center Aurinkoristeys and Kouvola’s Työterveys. In addition to acquisitions, the company announced that it will open an occupational healthcare center to Rovaniemi and a healthcare center to Vaasa. The company has also agreed on cooperation with Sydänsairaala and pilot cooperation with Pohjola Vakuutus.
Pihlajalinna seeks annual cost savings of EUR 14m
Pihlajalinna announced in mid-June that the company will launch the preparations of an efficiency improvement program. Through the program, the company seeks to achieve annual cost savings of EUR 14m. The cost savings sought are meaningful as the company’s adj. EBIT in 2018 was EUR 14m. Last year, the company underwent organizational restructuring and in connection with that, conducted codetermination negotiations. The estimated annual cost savings of these were EUR 2.8m. The company stated earlier in Q1’19 that its focus in 2019E is to improve profitability by organic growth, increasing cross-selling and by addressing profitability issues in the new medical service centers. The commence of the newest efficiency improvement program supports the company’s long-term target to reach EBIT margin of 7%, which so far has seemed rather distant. We will update our estimates accordingly once we have more detailed information about the program.
We maintain “BUY” with TP of EUR 13
Our 2019E estimates are intact ahead of Q2 earnings. The company expects 2019E revenue to increase from last year while EBIT is expected to increase notably from last year. We foresee 2019E revenue of EUR 525m (7.6% y/y), while consensus is at EUR 520m and EBIT of EUR 24m (71.4% y/y) vs. consensus of EUR 22.7m. The targeted cost savings add upward pressure on our estimates, but these will be updated once we have more detailed information. We expect Q2’19 revenue of EUR 134m (cons. EUR 132.5m) and EBIT of EUR 4.8m (cons. EUR 4.6m) resulting in EBIT margin of 3.6%. On our estimates, Pihlajalinna trades at 19E-20E EV/EBITDA multiple of 7.2x and 6.6x, which translates into ~25% discount compared to the peer group. We keep our rating “BUY” with TP of EUR 13 ahead of Q2.
Pihlajalinna hosted the 2019 CMD last Friday. The focus of the event was on increased health and social care costs, cooperation of private and public sectors as well as the digitalization of health care. Pihlajalinna did not make any changes to its ‘19E guidance nor its long-term financial targets. We maintain our rating “Buy” with TP of EUR 13.
Need of new solutions for arranging services
The finances of Finnish municipalities have continued to deteriorate and municipalities are forced to find new solutions to balance their increased health and social care costs. Cooperation with private sector is no longer purely voluntary. As Pihlajalinna stated in Q1, municipalities’ activity has increased after the failure of the SOTE reform, despite of the restriction law.
New opportunities on occupational healthcare
Pihlajalinna has been able to use its network to expand services across the country. The company sees opportunities in expanding its occupational healthcare network as municipalities and other public sector entities are interested in divesting the occupational healthcare providers they currently own. The company targets to expand in basic-level specialized care and non-urgent specialized care as the public sector has made cuts in operations and centralized specialized care in fewer units.
Focusing on profitability improvements in 2019E
Pihlajalinna’s plan is to improve its profitability by organic growth, increasing cross-selling, and by addressing profitability issues in the new medical service centers. Pihlajalinna will also improve its customer service experience by bringing new digital solutions to the market, which will also be a significant profitability driver in the future.
Guidance for 2019E intact
Pihlajalinna reiterated its guidance for 2019E; to increase its revenue and EBIT in 2019E from 2018 levels. The company did not make changes to its long-term targets and expects EBIT % of 7% in long-term. We keep our estimates intact. We maintain our rating “Buy” with TP of EUR 13.
Pihlajalinna’s Q1 earnings were close to expectations. After a weak ’18, the company was able to improve its profitability and increase its organic growth. Pihlajalinna’s focus in 2019E is to take further actions to improve its operating profit. We keep our rating “BUY” with new TP of EUR 13 (12).
Profitability improvements continue in 2019E
In Q1, Pihlajalinna improved its operating profit with adjusted EBIT margin of 3.0% (-0.1% in Q1’18). Revenue growth was supported by new customer relationships in occupational healthcare but also by the new partnership with Fennia. Organic growth was 2.8% in Q1. In 2019E, the company continues focusing to improve profitability especially in clinics with weaker profitability levels. The company will also strengthen its services locally in mobile. Pihlajalinna’s interest is to expand its cooperation with municipalities and expand its occupational healthcare network in ‘19E.
SOTE collapsed but change is still needed
The health and social services reform collapsed in March. It is still unsure, whether the new government will start again with the SOTE reform but municipalities still need to find solutions for finding balance of financing health and social services. After the collapse of the reform, Pihlajalinna sees activity from municipalities has increased and expects that there is demand for their healthcare services.
We keep our rating “BUY” with new TP of EUR 13
Pihlajalinna targets to increase its revenue and EBIT in 2019E from 2018 levels. We foresee EBIT of EUR 24m (4.5% margin) and EUR 25m (4.6% margin) in ’19-‘20E. As Q1 revenue was above our expectations, we have increased our revenue expectation in 2019E to EUR 525m (previous EUR 515m). On our estimates, Pihlajalinna trades in 2019-2020E EV/EBITDA multiple of 7.3x and 5.9x. which translates into 23% and 26% discount compared to peer group. We maintain “BUY” with TP of EUR 13.
In Q1’19, Pihlajalinna’s revenue amounted to 132.5m vs. EUR 126m/128m Evli/cons estimates, while adj. EBITDA landed at EUR 12.6m vs. EUR 13,0m/13,0m Evli/cons estimates. Organic growth improved y/y. Revenue growth was supported by new customer relationships in occupational healthcare and the insurance company partnership with Fennia.
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.
Pihlajalinna’s organic growth, profitability and outlook for 2019E improved towards the end of 2018. The new contract pipeline improved somewhat, and clarity on SOTE in the coming weeks might increase activity in the municipality field, further boosting the pipeline. We think valuation looks attractive considering the recovery in margins and somewhat more promising outlook.
Profitability recovered to reasonable levels
Pihlajalinna’s profitability weakened in 2018 with to weak H1, but recovered to reasonable level in H2 as cost savings from co-determination negotiations kicked in, negative EBITDA-contribution from new clinic openings contracted and as organic growth turned back to positive territory in H2 with insurance revenue drop levelling off. Improved performance of H2 supports the outlook for 2019E, for which co. guides adj. EBIT to improve significantly. While competition has increased in certain service areas and cities, Pihlajalinna’s altered expansion plan and OP’s retreat from expansion plans should reduce risk of further capacity increases burdening profitability in the mid-term.
Growth prospects somewhat brighter; clarity on SOTE needed
Pihlajalinna started production of residential services in Laihia in Sep 2018. Provision of occupational healthcare services for Stora Enso started in Jan 2019. Additionally co. has been negotiating with Laitila, Ruovesi and Kristiinankaupunki, although at present each remain undecided. Overall, municipalities’ eagerness to strike new contracts remains impacted by the lack of clarity on how the SOTE reform turns out. Improved clarity on SOTE in the coming weeks might improve activity in the municipality field. Additionally, Pihlajalinna’s geographical reach has expanded in 2017-2018, improving its positioning to win new business.
“Buy” with TP of EUR 12 intact
On our estimates Pihlajalinna is now valued 8.4x EV/EBITDA in FY19E, which translates into 10% discount to its own 3yr NTM historical average (9.3x) and to 16% discount to the peer group. We think valuation looks attractive considering the recovery in margins and a more promising outlook since H2’18. We retain “Buy” rating with TP of EUR 12. Our TP values the shares 9.0x EV/EBITDA on 2019E estimates, close to 3yr historical avg (9.3x).
Pihlajalinna’s Q4 financials were close to estimates and guidance did not surprise. While new outsourcing contracts from previous or ongoing negotiations remains uncertain, the expanded geographical reach should improve prerequisites for growth in other areas as well. We think valuation continues to look attractive. We retain “Buy” rating with TP of EUR 12.
Profitability at reasonable level in Q4
Pihlajalinna’s adj. EBITDA margin improved y/y in Q4, after improving to flat y/y level in Q3 from weaker H1. However, of the EUR 2.6m y/y adj. EBITDA improvement EUR 2.4m was explained by improved profitability in public specialized care, which seemed to be largely due to service provider refunds from hospital districts related to cost accruals. Amount of these refunds has fluctuated a lot historically. Profitability thus looked better than it was in underlying terms, but it was still at a reasonable level in our view.
Not much new to tell of the new contract pipeline
Pihlajalinna has been in negotiations over new potential contracts with Laitila, Ruovesi and Kristiinankaupunki. While decisions from some of these were expected by the end of 2018, each remains undecided. Overall, municipalities’ eagerness to strike new contracts remains impacted by the uncertainty related to the SOTE reform. Activity could increase if SOTE fails in the coming weeks, but overall visibility for how municipal activity develops is not great, in our view. Yet with the expanded clinic network the company should be better positioned to win new business for example in occupational healthcare, in our view.
Retaining “Buy” with TP of EUR 12
On our estimates Pihlajalinna trades 7.7x and 6.8x EV/EBITDA in FY19-20E, respectively. We think valuation continues to look attractive. We retain “Buy” rating with TP of EUR 12.
Pihlajalinna’s Q4 revenue and adj. EBITDA were close to both our and consensus estimates. Profitability improved y/y, but looks to be largely explained by service provider refunds, which have involved a lot of fluctuation historically. Organic growth remained positive (+1.3%) from Q3. Dividend proposal is EUR 0.10 per share, marginally better than expected. Guidance for 2019E looks to be largely reflected in consensus: revenue is to improve while adj. EBIT is to improve clearly. Overall, the Q4 report looks just fine.
Pihlajalinna will report its Q4 earnings on Feb 15th. Profitability development and news flow regarding the new contract pipeline are of interest, as before. Our rating and target price (“Buy”, TP EUR 12) are unchanged ahead of Q4.
Company lost two small contracts during Q4
Kymijoen Työterveys, which Pihlajalinna acquired in early 2018, lost two customer contracts (Kouvola and Kotka) in Q4, following tendering processes. Contracts were transferred to Terveystalo from start of 2019. Personnel of Kymijoen Työterveys was given protection against dismissal for two years. Pihlajalinna plans to utilize the resulting personnel surplus in other undersupplied regions as well as in its other private service provision within the region. Management has estimated that the revenue impact of the two lost contracts is about EUR -2m in total annually. We assume the negative earnings impact at EUR 1m+ for 2019E.
Terveyspalvelu Verso acquired in Q4
Pihlajalinna executed on its altered expansion plan by acquiring Terveyspalvelu Verso, which produces occupational healthcare services at 17 clinics in Northern Savo region. Price tag was not disclosed. Transaction was completed at the end of Q4.
We expect profitability to improve in Q4
Pihlajalinna’s profitability and organic growth showed signs of turning to better in Q3, supported by a streamlined cost structure and the drop of insurance revenue leveling out. We expect cost savings to continue supporting profitability and foresee adj. EBITDA margin improving y/y in Q4.
Rating and TP unchanged ahead of Q4
We expect Q4 revenue of EUR 127m (growth 18%) and adj. EBITDA of EUR 10.9m (margin 8.6%) vs. EUR 8.5m (margin 7.9%) last year. We expect a dividend to be cut to EUR 0.08 vs. EUR 0.16 last year, due to higher leverage and lower earnings in 2018E. Our rating and target price (“Buy”, TP EUR 12) are unchanged ahead of Q4.
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.
Pihlajalinna’s revenue is in line, but profitability improved more than expected. Organic growth also now turned positive and was +1.1%, after being negative in H1. Guidance for 2018E is intact.
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2022 revenue is expected to increase substantially while adj. EBITA is expected to decrease from 2021 level
Long-term targets: revenue growth of EUR 250m by the end of 2025 (2021 as the baseline), adjusted EBITA margin of over 9 percent and net debt/EBITDA below 3x
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