Shifting Auto Markets Will Squeeze Margins But Allow Recovery

Key Takeaways

• Evolving automotive trends, sustainability pressures, and customer concentration are reducing market opportunities and increasing risks to stable revenue and profit.
  
• Supply chain disruptions, trade tensions, and OEM bargaining power are compressing margins and intensifying operational challenges.
  
• Resilient cash flow, disciplined cost management, and new OEM contracts position Novem Group for margin recovery and renewed earnings growth as delayed revenues return.

Catalysts

Develops and supplies trim elements and decorative function elements for car interiors in the automotive industry.

• The accelerated shift in automaker focus from traditional premium interior design elements to minimalistic, smart-surface vehicle interiors and digital solutions is expected to shrink Novem's addressable market over the long-term, likely suppressing future revenue growth as demand for its traditional trim products declines.
  
• Heightened global emphasis on sustainability and stricter regulation around recyclability may drive up input costs and require sustained capital investment in R&D; if Novem fails to rapidly innovate eco-friendly solutions, it faces margin compression and potential loss of key OEM contracts, putting persistent pressure on operating profit.
  
• The company's heavy reliance on a concentrated customer base of luxury and premium auto makers, as well as regional volatility-evidenced by pronounced declines in the Americas and Asia-magnifies revenue volatility; any contract losses or continued production delays from these partners would present a material risk to stable sales and earnings.
  
• Intensifying protectionism, supply chain disruptions, and ongoing trade tensions (notably U.S. tariffs) are creating ongoing uncertainties and operational challenges, resulting in production stoppages, project delays, and unfavorable FX effects; these headwinds are already eroding revenue and profit margins and show no clear signs of permanent resolution.
  
• Larger automotive OEMs are consolidating suppliers and demonstrating increasing bargaining power, which could lead to stricter price negotiations and difficulty passing on raw material cost increases; this shift is likely to result in further gross margin compression for Novem over the long run, challenging its ability to sustain historical levels of profitability.

Novem Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Novem Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Novem Group's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.6% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach €29.5 million (and earnings per share of €0.69) by about August 2028, up from €24.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the DE Auto Components industry at 13.6x.
• Analysts expect the number of shares outstanding to grow by 3.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

Novem Group Future Earnings Per Share Growth

Risks

• Despite Q1 revenue and margin declines, management emphasized that much of the revenue loss was driven by delayed rather than cancelled Tooling projects, meaning that these revenues are expected to return in later quarters, which could provide a rebound to top line growth and group earnings.
  
• The company achieved positive free cash flow of 1.3 million euros in the quarter, a sharp year-on-year improvement, and working capital discipline led to a reduction in inventories and stronger cash conversion, supporting financial resilience and the potential for stable net margins over time.
  
• New order wins from major OEMs such as Volvo and General Motors indicate continued demand for Novem's offerings, which, when combined with the ramp-up of a premium U.S. electric vehicle platform, could drive future revenue growth and enhance earnings stability by diversifying revenue streams.
  
• The company maintained a robust liquidity position, with cash and cash equivalents increasing to 143.2 million euros and net financial debt declining to 150.7 million euros over the year, allowing flexibility for growth investments and safeguarding against adverse market shocks, which is supportive for both net margins and earnings.
  
• Active cost reduction programs and leaner capital expenditures, along with investments in production capacity expansion for new customer programs, suggest that Novem is primed to benefit from any cyclical recovery or sector growth, potentially fueling improved operational leverage, margin recovery, and ultimately lifting group earnings and share price.

Valuation

• The assumed bearish price target for Novem Group is €4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Novem Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €26.0, and the most bearish reporting a price target of just €4.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €555.0 million, earnings will come to €29.5 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of €3.88, the bearish analyst price target of €4.0 is 3.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.