Fit For Growth Program And R&D Investments Will Strengthen Future Competitiveness

Key Takeaways

• Strategic expansion and R&D investments aim to improve competitiveness, revenue, and cost efficiency, enhancing margins and profitability.
  
• Growth in Chinese market shares, especially in automotive and renewable energy, is poised to elevate revenues and regional earnings.
  
• Increased competition, pricing pressure, and financial strain on cash flow and equity could challenge LEM Holding's future earnings and capital raising ability.

Catalysts

Provides solutions for measuring electrical parameters in China, Japan, South Korea, India, Southeast Asia, Europe, Middle East, Africa, NAFTA and Latin America.

• The Fit for Growth performance improvement program is aimed at enhancing competitiveness by optimizing operating expenses and the organizational setup, which could positively impact future net margins and profitability.
  
• Continued investment in research and development (R&D) and innovation, particularly in expanding the product portfolio and opening new R&D centers, aims to drive revenue growth through the development of new markets and applications.
  
• The strategic expansion into lower-cost manufacturing locations in Malaysia, China, and Bulgaria is expected to improve cost efficiency and potentially enhance gross margins over time.
  
• The stabilization and potential growth of the Chinese market, as reflected in the increased market share in automotive and renewable energy sectors, could lead to higher revenues and improved earnings from this region.
  
• The introduction of new ERP systems and digitalization initiatives in SG&A functions are expected to lead to increased operational efficiency, potentially improving net margins in the future.

LEM Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LEM Holding's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 16.4% in 3 years time.
• Analysts expect earnings to reach CHF 64.9 million (and earnings per share of CHF 46.42) by about July 2028, up from CHF 8.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF76.8 million in earnings, and the most bearish expecting CHF53 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, down from 118.4x today. This future PE is lower than the current PE for the GB Electronic industry at 32.6x.
• 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 5.47%, as per the Simply Wall St company report.

LEM Holding Future Earnings Per Share Growth

Risks

• The company reported a significant 30% drop in sales due to high levels of destocking at customers, impacting revenue and net margins.
  
• LEM's equity ratio fell to 35% following a dividend payout and low net profit, which could impact the company's financial stability and its ability to raise capital.
  
• The net working capital increased significantly due to inventory growth and low sales, which could further strain cash flow and limit operational flexibility.
  
• The company's order backlog has returned to pre-COVID levels, suggesting a lack of forward sales visibility, which may limit future earnings growth.
  
• There's increased competition and pricing pressure, particularly from newer Chinese market players, which could negatively impact revenue and profitability.

Valuation

• The analysts have a consensus price target of CHF1133.333 for LEM Holding 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 CHF395.4 million, earnings will come to CHF64.9 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 5.5%.
• Given the current share price of CHF873.0, the analyst price target of CHF1133.33 is 23.0% 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.