This report is a summary translation of the report “Vankasti eteenpäin haastavassa markkinassa” published on 7/24/2024 at 8:00 am EEST. We reiterate our Buy recommendation and EUR 24.0 target price for Tietoevry. Q2 was in line with expectations in terms of operations and commentary, and we left our forecasts broadly unchanged. In 2024, we expect the company’s earnings to be at the level of the comparison period, due to a challenging market, but to grow moderately in the coming years. Our forecasts are clearly below the company’s target levels. The share's valuation picture is still very attractive from several angles (2024e P/E: 14x, adj. P/E: 9x, DCF: EUR 29, SOTP: EUR 26 and expected return ~20%).  Q2 was operationally well in line with our expectations Tietoevry's revenue increased by 3% to 715 MEUR, in line with our and market expectations. Organic revenue grew by 1% but working-day adjusted revenue decreased by -1%. By business area, organic growth was best supported by Tietoevry Banking (+5%) and Tietoevry Industry (+5%). Tietoevry’s adjusted EBITA was 78 MEUR or 11% of revenue (Q2’23: 73 MEUR), which was well in line with our and consensus forecasts. The improvement in profitability was driven by organic growth and efficiency measures. However, one-off costs were higher than expected, driven by strategic assessments and restructuring costs. As a result, reported EBIT landed at 48 MEUR, below our forecast of 60 MEUR. Multiple efficiency programs underway across all business areas In the second quarter, Tietoevry launched an efficiency program in Tech Services and in July in Create, affecting up to more than 500 employees in total. In addition, Tietoevry Create is updating its operating model to achieve greater customer focus, service innovation, global scalability and operational efficiency. Moreover, the company has already implemented efficiency measures in Tietoevry Banking, Care and Industry. In this way, efficiency measures are being implemented in all services. In our view, there is a continuous need for efficiency and reorganization at the scale of Tietoevry. However, the current market situation is creating a greater and more extensive need for restructuring at Tietoevry, as well as at other companies in the industry. Tietoevry remains cautious in its market commentary, but we expect small earnings growth in the coming years There were no significant changes in Tietoevry's outlook compared to the company's previous comments, and the company expects the market weakness to continue in H2. The company guides its organic growth to be 0-3% for the full year 2024. In addition, the company expects EBITA to be 12-13% in 2024 (2023: 12.6%). We have left our operating forecasts largely unchanged (-1 to 3%) and expect the company's organic revenue growth to slow to 1% (4-6% in 2022-23), driven by a challenging market. In addition, we expect the adjusted EBITA margin to be 12.6% in 2024 (12.6% in 2023). Profitability is supported by a better revenue mix and lower employee turnover, but limited by wage inflation (4.5%), which is difficult to pass on to customer prices. In 2025-2026, we expect revenue growth of some 3-4% and EBITA to gradually rise to around 13%. The valuation picture remains very attractive and a strong dividend provides a good base return With our estimates, Tietoevry’s adjusted P/E and EV/EBIT ratios for 2024 are 9x and almost 50% below peers. The corresponding reported ratios are 12-14x, but almost half of the adjustments are PPA depreciation, which do not affect cash flow and we also adjust these for peers. In our view, the absolute valuation of the share is attractive and the relative valuation is highly attractive. The expected return on the share also rises to an attractive level of nearly 15% on the back of 5% earnings growth and an 8% dividend yield alone. Moreover, the sum-of-the-parts calculation (EUR 26) clearly indicates a higher value than today and is a relevant way to look at the valuation, even if the Banking business remains part of the whole, at least for now. The DCF calculation (EUR 29) also indicates a clear upside.

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