Operational Efficiencies Will Reduce Costs, But Revenue Decline And Market Challenges Will Persist

Key Takeaways

• Significant EBITDA improvements and reduced net debt boost financial health and investor confidence.
  
• Strategic European product shift boosts revenue and margins, driven by BEYOND program savings and energy efficiency initiatives.
  
• Belysse Group faces revenue declines, high debt, and potential profit pressure from rising costs and market competition, signaling challenges in improving future earnings.

Catalysts

Engages in the production and sale of textile floor coverings for commercial and residential applications in Europe, North America, and internationally.

• Belysse Group is experiencing significant EBITDA improvements driven by cost-saving measures such as reduced raw material costs and operational efficiencies, which could lead to enhanced net margins.
  
• Strategic shifts towards more profitable product offerings, particularly in the European residential market, are expected to boost revenue growth and improve net margins over time.
  
• The implementation of the BEYOND program, with a focus on Lean initiatives, has already resulted in substantial savings. Continued success in this program could further enhance EBITDA and net margins.
  
• The company's reduction in net debt and leverage improvements indicate stronger financial health, potentially leading to better earnings stability and investor confidence.
  
• Emphasis on sustainability and energy efficiency initiatives as part of long-term strategic projects can reduce operational costs and enhance revenue through potential incentives or market differentiation, impacting earnings positively.
  

Belysse Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Belysse Group's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.2% today to 0.9% in 3 years time.
• Analysts expect earnings to reach €2.7 million (and earnings per share of €0.14) by about February 2028, down from €9.4 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 28.5x on those 2028 earnings, up from 2.4x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 2.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.12%, as per the Simply Wall St company report.

Belysse Group Future Earnings Per Share Growth

Risks

• The Belysse Group experienced a 7% year-on-year revenue decline in H1 2024, with significant decreases in both the U.S. (6.2%) and European (7.8%) markets, which could signal continued challenges in rebuilding revenue amidst market softness.
  
• The company's net debt remains high at €139.2 million, although it decreased from previous levels, this financial leverage could impact future earnings, especially if revenue does not improve as expected.
  
• The residential business, particularly in Europe, is experiencing continued market softness and lower volumes, which might negatively impact future net margins if demand does not pick up.
  
• Rising gas prices and transportation costs may offset any gains in raw material cost reductions, potentially squeezing future earnings if these costs increase significantly.
  
• There is stable competition in the market with uncertain future pricing stability, which could lead to increased pricing pressure and impact on revenue and profitability margins.

Valuation

• The analysts have a consensus price target of €1.6 for Belysse Group 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 €286.7 million, earnings will come to €2.7 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of €0.64, the analyst price target of €1.6 is 60.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.