AFRY Hoping for the Best…

/ July 17, 2022/ ÅF Pöyry / AFRY, Financials, Finland, Infrastructures, Norway, Sweden

AFRY is hoping for the best but expecting the worse for H2 2022. The company made clear that the macro-economic conditions and the geopolitical context were uncertain as ever. As a result, AFRY is prioritizing cost savings, efficiencies, and price increases. The company continues its SEK 100m cost-saving program, primarily targeting its Infrastructure Division (SEK 80m). AFRY will drive efficiencies with its SaaS ERP roll-out. Finally, it continues to raise prices with clients.

No Sign of A Slowdown

The Infrastructure Division, AFRY’s most prominent business unit, suffered from flat growth (+1.5% organically). Despite significant COVID sick leave, market conditions remain good, but AFRY continues to suffer from limited momentum for the fourth consecutive year. AFRY is monitoring its architecture business, which will give early signs of a slowdown. It also expects a softer environment in residential real estate, driven by material price inflation and rising interest rates.

However, AFRY has not yet seen any sign of a slowdown. KPIs were positive in Q2 2022. Its utilization rate was 75.8%, up 0.6 pts yoy, and up 1.4 pts sequentially. The organic growth was 6.3%, despite a negative 1.2 pts working days impact. AFRY has improved its organic growth and is roughly in line with Sweco’s performance. Compared to international ER&D competitors, AFRY is more resilient during difficult times and has lower growth during good times. Despite increased utilization rate and prices, its Q2 2022 EBITA margin eroded, impacted by a negative working day effect and investments in its ERP.

The Energy Division is on its way to flat revenues. The Q2 organic growth was +7.5%, after a weak Q1 (-6.9%). The division has a decent adjusted EBITA margin (9.7% in H1 2022), and AFRY now wants to accelerate its growth. The company acquired a small Irish competitor, Ionic Consulting, with strength in onshore wind engineering. Ionic strengthens AFRY’s portfolio to renewables. Demand for sustainable energy is very favorable, especially in Europe. However, the division will suffer from Finland canceling its nuclear plant program with Russian firm Rosatom in light of the Russian invasion of Ukraine.

AFRY X “In Investment Mode”

Finally, AFRY X, the “digital” division, grew revenues by 29.2% yoy in Q2 2022, thanks to acquisitions and a good demand level in cybersecurity and data. However, its organic growth was very disappointing (+0.2%). Services were up 25% to SEK 290m, while software licenses more than doubled. AFRY X is an investment mode, with the division reviewing its software product portfolio and making investment/divestment decisions. The division is still young, but the performance is not what one would have expected.

Hoping for the Best But Still to Solve its Challenges

In short, AFRY has to solve one primary challenge: get the Infrastructure and Energy Divisions back to growth. The Infrastructure Division suffers from internal execution, we think. The company has a good service mix with limited exposure to the residential sector. However, Sweco seems to be performing well. We will look into this.

The Energy Division is, unlike AFRY’s other business units, very international, and bidding for projects globally, as well as in Nordics. The pandemic and travel restrictions have not helped. However, AFRY struggled in this unit years before it acquired Pöyry. The Energy Division is now very decently profitable by AFRY’s standards, but growth is not yet in sight. We will dig into this too.

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