The Q3 report was in line with our estimates and relatively uneventful overall. ARR continues to grow sequentially, albeit with low absolute numbers. This is due to Litium having a high fixed revenue base. Costs were under better control than we expected in the quarter, but we assess that Litium will eventually ramp up costs as conditions improve for its clients, i.e., when client volumes rebound.
'24e-'26e EBITDA up 9-3%
We trim '24e-'26e sales and ARR by ~1% on the back of the report. However, we raise '24e-'26e EBITDA by 9-3% due to the strong cost control. With the company's current cost control, the margins are likely to be strong while growth is likely to be somewhat more muted (around 14-11% ARR growth for '25e-'26e). With an improved pipeline, growth is likely to be derived from fixed revenue growth, while the variable revenue growth is still contingent on improving conditions for Litium's clients. We are still optimistic about the company's operating performance and prospects thanks to Litium's dependable operating performance.
Valuation
Our revised estimates imply that the company is trading at an EV/ARR multiple of 1.8x and at a '25e EV/EBITDA of ~7x, whereas Nordic IT services peers are trading at a '25e EV/EBITDA of ~15x.
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