Wartsila Earnings: Order Intake Beat Estimates, but Profitability Remains Subdued Despite Progress

Narrow-moat Wartsila WRT1V delivered an impressive quarter, reporting organic order intake growth of 29% to EUR 1.7 billion, comfortably above company-compiled consensus of EUR 1.5 billion. Demand was broad-based across operating segments, but the energy segment continues to drive the outperformance, supported by a 3.5-fold increase in demand for the group’s energy storage solutions. However, the energy storage subsegment continues to have a dilutive impact on group profitability, and despite margins improving 70 basis points to 6.0%, remains well below our medium-term expectations and group targets. While the market is impressed with results, which sees the stock up 8% following its earnings release, we view shares as fairly valued to our EUR 9.20 fair value estimate, which we maintain.

Revenue grew 19% during the quarter, supported by cruise customers in the marine power segment and energy storage solutions. Wartsila’s book/bill ratio is 1.2 times, a leading indicator that revenue growth is likely to persist in the short term. The order book is largely unchanged at EUR 6.2 billion, of which more than half is expected to be delivered by the end of the year.

Operating profit grew 34% to EUR 88 million, with the marine power division being the biggest contributor to the group’s margin expansion. The segment benefitted from the spillover impact of price increases during 2022 and good service performance, which helped offset declining profitability in the marine systems segment. While we expect the group to continue to deliver margin expansion as cost inflation eases and its energy storage business gains scale, we still expect its EBIT margin in 2023 to remain well below its desired 12% operating margin target.