Rising Costs And EV Shift Will Erode EMEA Market Stability

Key Takeaways

• Industry shifts and divestments will increase NORMA Group's exposure to cyclical risks, revenue volatility, and concentration in core automotive and industrial markets.
  
• Operational and regulatory pressures combined with rising costs may undermine profitability and threaten the success of margin improvement initiatives.
  
• Strategic transformation, operational efficiency gains, and focus on higher-growth applications are driving margin improvements, business diversification, and stronger earnings resilience with enhanced shareholder returns.

Catalysts

Manufactures and sells engineered joining technology solutions in Europe, the Middle East, Africa, the Americas, and the Asia-Pacific.

• The accelerating shift towards electric vehicles and alternative mobility solutions is expected to further erode demand for traditional automotive hose and connection systems, putting ongoing pressure on NORMA Group's core product volumes and leading to sustained revenue declines in Mobility & New Energy.
  
• Global supply chain localization and increased onshoring are likely to intensify operational complexity and raise production costs, reducing NORMA Group's cost competitiveness compared to emerging regional and low-cost Asian competitors, which will weigh on operating margins and erode earnings power.
  
• Heightened regulatory requirements for safety, emissions, and recyclability are anticipated to drive up research, development, and compliance costs across the industry, and any delay or inefficiency in NORMA Group's response could result in squeezed net margins and lower profitability for an extended period.
  
• The planned divestment of the Water Management business will reduce diversification and expose NORMA Group to greater cyclicality and concentration risk in its industrial and automotive end-markets, increasing revenue and earnings volatility and reducing overall business stability over time.
  
• Structural challenges in EMEA, including low demand, persistent personnel inflexibility, and ongoing margin weakness, highlight the difficulty of realizing operational savings from the transformation program, calling into question whether the targeted adjusted margin improvements will materialize and creating ongoing downside risk to long-term earnings and cash flow.

NORMA Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NORMA Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NORMA Group's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.1% today to 4.1% in 3 years time.
• The bearish analysts expect earnings to reach €48.9 million (and earnings per share of €1.66) by about August 2028, up from €1.0 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 6.2x on those 2028 earnings, down from 537.0x today. This future PE is lower than the current PE for the GB Machinery industry at 20.3x.
• 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 7.54%, as per the Simply Wall St company report.

NORMA Group Future Earnings Per Share Growth

Risks

• Strategic transformation initiatives, including significant cost reductions from footprint consolidation, OpEx savings, and a shift to a leaner organization, are already showing benefits in quarter-over-quarter adjusted EBIT margin improvement, supporting a path toward a double-digit margin target at group level which may lead to a rebound in earnings.
  
• The company is making tangible progress in expanding into higher-growth, higher-margin Industry Applications-demonstrated by increased sales from data center solutions and substantial new orders in e-mobility for Chinese OEMs-which diversifies revenue and reduces cyclicality risk, likely supporting more stable top-line development.
  
• Operational efficiency gains from investment in automation and flexible manufacturing, exemplified by the automation project in Poland that reduced required labor per cell by 75 percent, are driving productivity improvements, lowering production costs, and supporting the potential for sustainable higher net margins.
  
• Following the planned divestment of the Water Management business, management has articulated clear capital allocation priorities including deleveraging, value-enhancing M&A in Industry Applications, and increased shareholder returns via buybacks or special dividends, all of which could have a positive impact on EPS and total shareholder yield.
  
• The ability to pass through tariff-related costs to customers-demonstrated by successful negotiations to recover approximately 90 percent of imposed tariff costs-shows strong pricing power and customer relationships, mitigating risks to margins and supporting future earnings resilience as regulatory costs fluctuate.

Valuation

• The assumed bearish price target for NORMA Group is €7.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NORMA 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 €27.0, and the most bearish reporting a price target of just €7.9.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €48.9 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of €17.14, the bearish analyst price target of €7.9 is 117.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.