Expansion Into Energy And Digital Markets Will Unlock Future Revenue Opportunities

Key Takeaways

• Strategic focus on energy transition and innovative sectors positions Verbrec for revenue growth as deferred projects and new markets are realized.
  
• Expanding training services and solid gross margins support improved profitability and financial performance.
  
• Deferred opportunities and reduced capital expenditures from clients, especially in mining, threaten Verbrec's short-term revenue and future growth prospects.

Catalysts

Primarily provides engineering, asset management, training, and infrastructure services to mining, energy, defense, and infrastructure industries in Australia, New Zealand, Papua New Guinea, and the Pacific Islands.

• Verbrec's pipeline of deferred projects, expected to be realized in financial year 2026, indicates a substantial future revenue opportunity. This can result in increased earnings as these projects are executed.
  
• The company's focus on energy transition markets, including the gas market transition and renewable energy projects, positions it well to benefit from sector growth, potentially driving revenue increases.
  
• Verbrec's strategic entry into innovative areas like digital twins and its product StacksOn presents an opportunity for new revenue streams through software license fees and service contracts, enhancing future revenue potential.
  
• Expanding their Competency Training operations signals potential growth in revenue from training services, particularly as demand increases from international customers seeking to meet stringent Australian electrical standards.
  
• The company’s strong and improving gross margins provide a foundation to grow net margins and profitability, as increased revenues from upcoming projects flow more efficiently to the bottom line.

Verbrec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Verbrec's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 9.1% in 3 years time.
• Analysts expect earnings to reach A$10.7 million (and earnings per share of A$0.03) by about April 2028, up from A$2.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the AU Construction industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Verbrec Future Earnings Per Share Growth

Risks

• Political uncertainty and economic downturn in New Zealand could negatively impact Verbrec's revenue and growth projections in those regions.
  
• Deferred opportunities might affect revenue short-term, as expected growth from these projects is delayed until financial year 2026.
  
• Reduced capital expenditure from mining clients has already led to decreased revenue from the sector, which might continue to affect overall earnings if the mining industry remains sluggish.
  
• The temporary nature of deferred client expenditures introduces a risk that projects might eventually get canceled, impacting expected future revenue streams.
  
• Execution risks related to expanding StacksOn into new markets and increasing the utility of the product might affect the company's ability to grow revenues from this segment.

Valuation

• The analysts have a consensus price target of A$0.35 for Verbrec 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$117.6 million, earnings will come to A$10.7 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of A$0.07, the analyst price target of A$0.35 is 79.1% 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.