Wartsila's Profitability Disappoints in Q3; Shares Remain Compelling Despite Our FVE Reduction

Narrow-moat Wartsila felt the brunt of cost inflation and an unfavourable sales mix in the third quarter, which contributed to a 6% decline in operating profit despite revenue growing 30%. While we expect Wartsila’s top line to continue to deliver robust growth as energy and marine customers seek to decarbonize their operations, we anticipate a longer-than-expected recovery in profitability. Cost inflation on the group’s existing order book, as well as an unfavourable sales mix driven by strong demand for the group’s loss-making energy storage solutions, will remain a headwind entering 2023. To reflect this, we have reduced our five-year average EBIT margin forecast by 140 basis points to 7.4%, subsequently lowering our fair value estimate to EUR 9.20 per share from EUR 10.80. The shares remain compelling for long-term shareholders, in our opinion.