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Investing.com -- UBS has downgraded Epiroc AB (ST:EPIRb) to “neutral” from “buy,”and cut its 12-month price target to 200 SEK from 240 SEK, citing a limited near-term margin recovery and revenue growth challenges, in a note dated Thursday.
The brokerage now expects adjusted EPS to be 3% lower in 2025 and 2026, and 4% lower in 2027 than previously forecast.
The downgrade is driven by four main concerns. First, margins in Epiroc’s Service division, which accounts for 43% of sales, have weakened due to a shift away from higher-margin parts and kits toward lower-margin service agreements and digital offerings.
UBS estimates the mix will be a roughly 20 basis point annual headwind to Service margins through 2027.
Second, the digital business, which makes up 9% of Service revenue, is less profitable than peers, with an estimated margin of 6% in 2024.
The majority of digital sales come from connectivity infrastructure, which UBS says has no margin, rather than higher-margin software.
Third, equipment backlog cover is at its lowest since 2019, raising the risk of flat or declining near-term equipment revenue.
UBS projects 0% organic revenue growth in the segment for the second half of 2025, which could pressure equipment and service margins.
Fourth, the brokerage argues Epiroc’s valuation premium to peers is no longer justified, especially as it forecasts Weir Group will overtake Epiroc in margins by 2027 and deliver faster earnings growth.
UBS acknowledges Epiroc’s strong exposure to mining capex and structural growth drivers like electrification and automation, but has determined that there is no longer a case for a “buy” rating at this time.
The revised price target reflects lower earnings forecasts, a reduced terminal growth assumption of 2% from 3%, and updated valuation inputs following second-quarter results.