AFRY Launches AFRY X, Its New Digital Division

/ November 21, 2021/ ÅF Pöyry / AFRY, AI, Analytics, Digital, IoT, News, Security, Sweden

AFRY Groups Digital Assets in AFRY X

AFRY will formally launch a new division, AFRY X, on January 1, 2022. The X division will provide IT services and “solutions” around IoT, analytics and AI, and cybersecurity. It will be the company’s sixth division and groups assets and employees from the other five divisions. It has approximately a revenue of SEK 1bn (USD 110m) and 800 employees. AFRY is gradually ramping up its digital investments and expects to spend SEK 100m in 2022, up from SEK 50m in Q1-Q3 2021.

Software In Sight

AFRY progresses on its digital portfolio transformation. The company had previously identified 2k engineergs working on digital engagements. With the creation of AFRY X, the company is carving out a set of offerings across divisions, and is productizing them. Beyond reusabiltiy across divisions, AFRY has software ambitions. Yet, it is not clear if AFRY follows a software product strategy, or has solution ambitions. The Real Digital Twin example provides an example of AFRY’s ambitions. The company has a created a hardware emulation on top of Siemens software. This suggests that AFRY it aiming to recreate the wheel, but complement capabilities of major industrial ISVs such as Siemens Digital Industries. This is clever.

The strategy looks good. However, the numbers are low. AFRY has only 12% of its headcount working on software (“digital”), and 5% only in AFRY X. This is the start of the journey, obviously. We expect AFRY to make more software M&As, even if valuation multiples are higher than in engineering services.

AFRY Rebounded by 7% In Q3 2021

In the meantime, AFRY announced decent Q3 2021 results. Revenues were up 7.4% yoy at cc/cs. The company benefitted from a favorable comparison basis (Q3 2020: -7.6%). Despite the rebound, the Q3 2021 revenues (SEK 4,419m) were below those of Q3 2019 (SEK 4,562m), despite AFRY’s acquisition spree in 2021.

Infrastructure Division Still Flat

AFRY sufffered in its largest unit, Infrastructure Division. Once a growth driver, the business unit has slows down in the past three years. the division’s revenues were up by only 0.6% yoy at cc/cs, despite favorable comps (Q3 2020: -5.2%). Infrastructure Division suffered from employees taking longer summer vacations (1 days) in most Nordics countries. This is in line with similar comments from Sweco. The business unit also suffered from one client in the rail and road industries in Sweden, which was slow to ramp up employees after the summer break. The Swedish infrastructure engineering industry remains very sensitive to T&M pricing, with competitor Sweco even measuring the impact of working time to the hour, and not the usual working day!

Looking ahead, AFRY believes it can fix Infrastructure Division. The company highlights it operates across many sub-markets, e.g., buildings (40% of revenues), roads, rail, water, environment, and architects. While road & rail slowed down, other sub-divisions performed well. The challenge is, therefore, confined.

A sign of confidence, AFRY just annnounced the acqusitition of a signficant competitor active in buildings/real estate, Vahanen. Vahanen is significant in size, with EUR 47m in revenues and 500 employees. It is present in ten locations in Finland and brings a real estate engineering capability that the former Pöyry did not have in the country.

Other Divisions Doing Well

To be fair, AFRY signaled several points of satisfaction in Q3. Industrial & Digital Solutions was up 18.5% yoy at cc/cs (Q3 2020: -12.5%), a sign that product engineering is back to growth. Process Industries was also by double digits (+10.6%). Management Consulting was up 32.5% thanks to the economic recovery and high M&A success fees. Finally, Energy Division is getting closer to flat revenue growth, despite the international travel restrictions, especially in South East Asia and Africa, where it has significant projects.

We think the future looks positive for AFRY: market conditions have greatly improved. Energy Division is close to a turnaround. Infrastructure Division needs some work but remains healthy and stable. AFRY now needs to communicate how it will fix it, and we will resume our positive feelings about the company.

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