• We cut '25e and '26e EBITA by 21% and 5% on weak margin
• Margins to remain weak in H1'25, but we think the issues are fixable
• Share is trading at 10-7x EBITA adj. on '25e-'27e (12-16% FCFy)

Underlying market remains stable

The market remained stable with good contract activity in Q4, according to management. And looking at FY24, the contract retention rate improved to 88%, in line with its long-term average. Organic growth was -1% in 2024 and -3% in Q4, slightly weaker than we expected, especially given the retention rate, here management points to variable volumes having normalised from high levels in 2023 as a negative factor. We think the organic growth will remain subdued in Q1 (-2%) partly for this reason but turn positive in H2. We expect 1% organic growth in '25 and 3% in '26-'27.

We think the cost issues are fixable

We understand that there are three main factors behind the weaker margins (4.4% in '24 vs. 5.4%/4.9% in '22/'23): 1) The Denmark organisation has been geared for higher growth and now needs to be right-sized, which should be low-hanging fruit. 2) Workforce planning, especially in cleaning, has not been effective, resulting in unnecessary costs for hired personnel. Skaraborgs Städ has been raised as an example, and here management told us changes have been implemented and the case closed. 3) The last harmonisation program backfired and resulted in added central costs and beuracracy. This time, the company will not start by hiring more people. Moreover, the union negotiations are completed and management says changes will be implemented by April 2025, which is promising.

Gearing to remain a concern in H1'25

We cut '25e and '26e EBITA by 21% and 5% on expectations of lower margins in H1'25 and a recovery to 5.3% in 2026 (vs. target of 5.5%). We conclude that the cost problems are fixable and that we do not see any structural changes to the business. However, the gearing should remain a concern (3.4x 2024, ~3.0x H1'25e). The share is trading at 10-7x EBI