On Tuesday, Jefferies downgraded Adesso SE (ADN1:GR) 's stock rating from "Buy" to "Hold." The firm also slashed the price target to €75.00 from €145.00. The downgrade was attributed to concerns over the company's workforce utilization and struggles within its IT solutions sector.
According to the firm, despite Adesso's significant growth, which includes a 23% compound annual growth rate (CAGR) since 2017 and a 15.4% organic growth in the first half of 2024, the company is facing challenges that are affecting its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin. Compared to its peers, Adesso's peak adjusted EBITDA margin in 2021 stood at 12.5%, which is lower than the industry's average of approximately 17-18%.
The EBITDA margin has seen a decline since its peak in 2021, dropping to 7.4% in 2023 and further to 4.4% in the first half of 2024. These decreasing margins have led to downward revisions in the company's EBITDA guidance for both 2023 and 2024.
The company recognized low workforce utilization as a key issue as early as the second quarter of 2023 and has since been attempting to improve the alignment between sales growth and workforce utilization. However, these efforts have not been successful, leading to a cut in EBITDA margin forecasts.
Jefferies has adjusted its sustainable EBIT margin projections for Adesso from 7.3% to 5.4% and made additional minor changes to its model. The firm also noted the weak performance in Adesso's IT solutions business, which has seen considerable investment in recent years without the anticipated returns. The analyst firm concluded that it would maintain a "Hold" rating on Adesso's stock until there is clear evidence of a sustainable return to the company's usual EBITDA target margin of 11-13%.
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