ÅF’s Q3 2018: it is all starting to make sense

/ October 25, 2018/ ÅF Pöyry / AFRY, Financials, Sweden

ÅF achieved a CC/CS revenue growth of 6.0% in Q3 2018, reaching revenues of SEK 2,995m (USD 328m). The performance, on the surface, looks similar to that of Q2 (+6.9% at CC/CS), however, Q2 benefitted from one additional working day, and Q3 did not. ÅF’s EBITDA margin rose by 50 bps to 7.4%, albeit benefitting from a favorable comparison basis with Q3 2017 having been impacted by restructuring costs. Taking out this impact, ÅF’s EBITDA margin was down.

Infrastructure Division continued to be the best-performing unit, with a CC/CS growth of 13.6%, and an EBITDA margin of 8.9%, up 230 bps. The slowdown of H2 2017 is now memories and the division is benefitting from its positioning in building road and rail, and architectures across Nordics. Overall, Industry Division is accelerating although ÅF’s management highlighted that its performance in Q4 should not be extrapolated based on Q3.

Industry Division, ÅF’s second-largest unit, continued to suffer from flat growth (+0.6% at CC/CS). The division has been transitioning away from T&M towards projects, focusing on automotive vehicles and autonomous cars, industrial automation, pulp & paper. ÅF’s management is confident it can turn around the division without impacting its profitability.

ÅF’s two smallest divisions, Energy Division, and Digital Solutions Division had diverging fate. Energy Division had flat growth in Q3 (+1.5% at CC/CS) and a drop of 290 bps in its EBITDA margin. Last quarter, ÅF had mentioned it was aligning the division on grids, heat and power networks, and nuclear refurbishment and decommissioning. ÅF has completed this transformation in Nordics and is now working on its international markets. The company is pulling out of counties like Iran that are too risky, from geographies where it is too small, and it being selective on contracts.

Finally, Digital Solutions Division, which groups a series of IT services and ER&D activities, enjoyed a solid 7.9% CC/CS growth. Like Infrastructure Division, Digital Solutions is accelerating thanks to the excellent market conditions. EBITDA margin was 8.9%. ÅF wants, like for Industry Division, to change the model of the unit towards projects.

With Infrastructure and Digital Solutions, ÅF is now walking on two legs. The trouble is that Digital Solutions Division is a very small unit, with SEK 505m (USD 55m) in revenues. As a result, ÅF’s CC/CS growth recovery is still a bit uncertain. The good news is that the company is now attacking sub-division after sub-division and its management is acting fast, and has the luxury of doing that in a very favorable market. Finally, ÅF is starting to make sense of its very broad ER&D portfolio: the company is now winning contracts that make use of its infrastructure and digital capabilities, with a recent deal for collecting data from Volvo cars and assess traffic conditions. ÅF’s transformation is all coming together. This is good news.

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