Divesting Water Management And ERP Upgrade Will Spark Success

Key Takeaways

• Divesting the Water Management business to refocus strategy may enhance profitability and positively affect adjusted EBIT margins.
  
• Investments in automation and a new ERP system could improve operational efficiency, boosting future earnings and productivity.
  
• The sale of the Water Management business alongside declining sales and currency fluctuations may affect NORMA Group's profitability and revenue growth amid market challenges.

Catalysts

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

• Implementation of the step-up profit improvement program and operational efficiency measures are expected to lead to better margins, increasing NORMA Group's competitiveness and potentially boosting net margins.
  
• The strategic decision to divest the Water Management business to focus on mobility and industry applications is likely to lead to higher profitability, impacting future adjusted EBIT margins positively.
  
• Investments in automation and the implementation of a new ERP system in Maintal could result in increased operational efficiency and productivity, positively impacting future earnings.
  
• Targeted market leadership in connection technology for liquids and gases combined with potential market expansions may drive future revenue growth, enhancing overall financial performance.
  
• The successful execution of the step-up program to foster a cultural and operational transformation is aimed at sustainable growth, potentially leading to higher future net margins and improved earnings.

NORMA Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NORMA Group's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 4.4% in 3 years time.
• Analysts expect earnings to reach €53.9 million (and earnings per share of €1.69) by about April 2028, up from €14.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €67 million in earnings, and the most bearish expecting €36.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 23.5x today. This future PE is lower than the current PE for the GB Machinery industry at 17.9x.
• 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 8.08%, as per the Simply Wall St company report.

NORMA Group Future Earnings Per Share Growth

Risks

• The sale of the Water Management business introduces short-term uncertainty and transaction costs of around €20 million, which could affect net earnings and overall profitability in the medium term.
  
• Declining sales in core segments such as Mobility & New Energy (8.9% reduction) and Industry Applications (6.4% reduction) highlight market challenges and could hinder top-line revenue growth.
  
• Currency fluctuations, particularly negative effects from the Americas and APAC region, could impact revenue and earnings unpredictability in those markets.
  
• Rising personnel costs and inability to fully compensate for declining sales volumes led to margin deterioration in EMEA, potentially affecting net margins and EBIT if not addressed effectively.
  
• Instability and volatility in European and Asian markets, especially concerning automotive and infrastructure sectors, suggest potential continued revenue pressure in key regions.

Valuation

• The analysts have a consensus price target of €18.271 for NORMA Group based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €53.9 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of €10.84, the analyst price target of €18.27 is 40.7% 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.