Shift To Full Ecosystem Provider Expected To Improve Customer Engagement

Key Takeaways

• WashTec's shift towards a full ecosystem provider could enhance customer engagement and grow recurring revenue through total care and digital connectivity.
  
• New product ramp-up and U.S. chemical expansion could increase sales and market share, positively impacting revenue and net margins.
  
• WashTec faces execution risks with declining North American revenue, low market share in chemistry, and operational challenges in new strategy implementation.

Catalysts

Provides solutions for car wash in Germany, Europe, North America, and the Asia Pacific.

• WashTec's strategy shift towards becoming a full ecosystem provider, focusing on total customer care and digital connectivity, implies potential for increased customer engagement and higher recurring revenue streams. This is likely to impact future revenue positively.
  
• The development and ramp-up of new products like SmartCare and SoftCare SE could drive future sales growth. The focus on standardization and modularization may reduce complexity and cost, improving net margins over time.
  
• Expansion of chemical product lines in the U.S., leveraging existing strong customer demand in Europe, provides an opportunity to capture new market share. This move can significantly impact revenue and contribute positively to net margins given the high margin nature of consumables.
  
• Implementation of a matrix organization and efficiency improvements in production are anticipated to enhance operational efficiency, positively impacting net margins and overall earnings.
  
• Improved order intake and backlog, especially from key accounts, suggest that WashTec is well-positioned to convert these into revenue, supporting top-line growth in upcoming quarters.

WashTec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WashTec's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 7.5% in 3 years time.
• Analysts expect earnings to reach €41.7 million (and earnings per share of €3.09) by about March 2028, up from €28.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €36.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 18.8x today. This future PE is greater than the current PE for the GB Machinery industry at 18.2x.
• 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 5.75%, as per the Simply Wall St company report.

WashTec Future Earnings Per Share Growth

Risks

• WashTec's revenue in North America has significantly decreased by 21.3% in the first nine months, primarily due to weaker sales to key accounts and a decline in direct sales business, which impacts overall revenue generation in a key market.
  
• Despite efforts to ramp up production and sales of new lines like SmartCare and SoftCare SE, a lower order backlog and weaker order intake at the beginning of the year have led to a 6.3% decrease in total revenue compared to the previous year, indicating challenges in sustaining revenue growth.
  
• The impact of weather conditions resulted in a fall in carwash volumes and a subsequent decrease in chemical revenues, which affects net margins due to reduced sales in consumables.
  
• WashTec's reliance on achieving a turnaround in North America, where they currently hold a market share of less than 1% in chemistry, presents significant execution risks that could affect earnings if the expansion fails to meet expectations.
  
• The successful implementation and integration of the new matrix organization and strategy to increase product and service offerings poses operational risks which, if not managed effectively, could lead to increased costs and impact net margins.

Valuation

• The analysts have a consensus price target of €51.625 for WashTec 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 €555.7 million, earnings will come to €41.7 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 5.8%.
• Given the current share price of €40.0, the analyst price target of €51.62 is 22.5% 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.