Expanding Into New South Wales And Adopting 3D Modeling Will Strengthen Competitive Edge

Key Takeaways

• Acrow's strategic focus on Industrial Services and successful contract acquisitions are driving significant revenue and earnings growth.
  
• Investments in product development and innovative engineering technology are enhancing cross-selling opportunities and competitive edge, potentially boosting margins.
  
• Increased tax and interest expenses, alongside market and project uncertainties, could negatively impact Acrow's net margins, earnings, and revenue growth.

Catalysts

Provides smart integrated construction systems across formwork, industrial services, and commercial scaffolding in Australia.

• Acrow is experiencing strong growth in its Industrial Services sector, now comprising 33% of group revenue and expected to rise further. This expansion comes from successful acquisitions and organic growth, which are set to boost both revenue and earnings.
  
• The company is investing in a robust product development pipeline, including Jumpforms and Acrowdeck, providing new cross-selling opportunities, thereby diversifying revenue streams and potentially enhancing net margins.
  
• Acrow has reached a record volume of contract wins, with the pipeline stronger than ever and now exceeding $200 million. This substantial backlog and future project commencements are expected to significantly increase revenue and earnings.
  
• The Industrial Services business provides stable, annuity-like earnings from contracts with blue-chip clients like Visy and BHP. Planned acquisitions and organic growth, especially in new markets like New South Wales, are expected to drive further revenue and earnings growth.
  
• Advancements in engineering technology, such as the shift to 3D modeling, are enhancing Acrow’s competitive edge and client satisfaction, which may justify premium pricing for services and lead to improved net margins over time.

Acrow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acrow's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.1% today to 12.6% in 3 years time.
• Analysts expect earnings to reach A$38.7 million (and earnings per share of A$0.12) by about February 2028, up from A$25.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from 13.9x today. This future PE is lower than the current PE for the AU Trade Distributors industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 3.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Acrow Future Earnings Per Share Growth

Risks

• Increasing tax expenses as Acrow transitions from utilizing tax losses to paying full taxes could negatively impact net margins and overall earnings.
  
• Rising interest costs due to increased debt levels and higher interest rates may reduce net margins and earnings.
  
• Softening market activity, particularly in Queensland's commercial sector due to external pressures, could adversely affect revenue generation.
  
• Heavy reliance on large infrastructure projects with uncertain commencement dates poses a risk of delayed revenue realization.
  
• The potential for project cancellations and increasing union-related disruptions in Queensland could impede consistent revenue growth and strain profit margins.

Valuation

• The analysts have a consensus price target of A$1.325 for Acrow based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$306.9 million, earnings will come to A$38.7 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$1.15, the analyst price target of A$1.32 is 13.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.