Aerospace And Defense Expansion Will Gradually Offset Automotive Weakness In Coming Years

Catalysts

About Bertrandt

Bertrandt provides engineering and R&D services for automotive and other technology driven industries, with a growing focus on aerospace, defense and medical technology.

What are the underlying business or industry changes driving this perspective?

• Although Bertrandt is broadening its footprint in higher margin aerospace and defense projects, integration risks and potential delays in program execution could limit the pace at which these contracts translate into sustained revenue growth and EBIT margin improvement.
• Despite strong long term demand for external R&D in areas such as software, electronics and validation, persistent postponement of platform and model decisions at key OEM customers may keep utilization below target levels, capping revenue recovery and constraining operating leverage.
• While management is targeting a 15 percent revenue share from aerospace and defense within two years, ramp up complexity, export controls and customer specific organizational models may slow scaling, which would temper the expected uplift in net margins from these structurally more profitable activities.
• Although international expansion into locations such as Mexico, Sweden and low cost engineering hubs positions Bertrandt to capture future global R&D outsourcing, execution missteps or slower than expected customer call offs could extend the drag from start up costs on earnings and cash generation.
• While the cost optimization program and leaner structure should enable EBIT margins between 6 percent and 9 percent at normalized capacity, any prolonged weakness in European automotive volumes or further project cancellations, particularly in Digital Engineering, could delay reaching this margin corridor and weigh on earnings volatility.

Assumptions

This narrative explores a more pessimistic perspective on Bertrandt compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Bertrandt's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -12.5% today to 5.5% in 3 years time.
• The bearish analysts expect earnings to reach €64.5 million (and earnings per share of €6.26) by about December 2028, up from €-126.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €142.1 million.
• 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 3.9x on those 2028 earnings, up from -1.5x today. This future PE is lower than the current PE for the GB Professional Services industry at 29.1x.
• The bearish 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 7.6%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If OEMs finally approve delayed life cycle and platform decisions, the large pipeline of more than EUR 4 billion in open RFQs could convert into higher utilization from the current 84 percent, which could drive stronger revenue growth and operating leverage than expected and lift earnings.
• The strategic diversification toward aerospace, defense and healthcare, supported by multi year, low triple digit million euro defense contracts and framework agreements with blue chip medical clients, could accelerate to the targeted 15 percent revenue share within two years and structurally improve net margins.
• Execution of the extensive cost optimization and restructuring program, including elimination of management layers, footprint reduction and more than EUR 90 million of identified savings, may push EBIT margins toward the 6 percent to 9 percent corridor on normalized capacity and materially boost earnings.
• International expansion into higher growth and lower cost locations such as Mexico, Sweden, Morocco, Romania, Turkey and India may allow Bertrandt to scale headcount by up to 2,000 employees at attractive rates, which would support competitive pricing and margin expansion as global R&D outsourcing grows and enhance both revenue and net margins.
• A sustained structural shift toward external R&D driven by increasing software, electronics and validation demands in automotive and defense, combined with stabilization at key German and French customers, could move Bertrandt from the current revenue decline of 19 percent toward a renewed growth trajectory and materially improve revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Bertrandt is €20.0, which represents up to two standard deviations below the consensus price target of €24.0. This valuation is based on what can be assumed as the expectations of Bertrandt'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 €32.0, and the most bearish reporting a price target of just €20.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €64.5 million, and it would be trading on a PE ratio of 3.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €18.2, the analyst price target of €20.0 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus 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.