Defense And Aerospace Expansion Will Drive A Stronger Future Earnings Profile

Catalysts

About Bertrandt

Bertrandt is an engineering services provider focused on development, testing and validation projects for automotive, aerospace, defense and medical technology customers.

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

• Normalization of customer platform decisions, such as Porsche life cycle and cycle plan approvals expected around late summer, should unlock currently delayed R&D programs and lift capacity utilization back toward historical levels. This supports a rebound in revenues and EBIT margins.
• Structural expansion in aerospace and defense engineering, underpinned by a multi year, low triple digit million euro defense validation contract and a targeted increase of this segment to roughly 15 percent of group sales, should diversify earnings away from cyclical automotive exposure and lift group margin quality.
• Ongoing relocation of R&D work to cost efficient international hubs in Mexico, Sweden, Morocco, Romania, Turkey and India, combined with the ability to scale headcount by 1,500 to 2,000 employees, positions Bertrandt to capture rising global engineering outsourcing volumes while structurally improving net margins.
• A comprehensive cost optimization program, including removal of a management layer, footprint reductions and over 250 individual measures exceeding EUR 90 million in identified savings, should turn current underutilization driven losses into positive operating leverage once volumes normalize and materially improve EBIT and earnings.
• Growing non automotive business with long term contracts in health care and medical technology from customers such as Siemens Healthineers, Sanofi and Roche, alongside high global R&D demand and more than EUR 4 billion in open RFQs, supports a sustained mid term project pipeline that can stabilize revenue growth and smooth free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Bertrandt's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.5% today to 3.3% in 3 years time.
• Analysts expect earnings to reach €38.6 million (and earnings per share of €3.82) by about December 2028, up from €-53.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.7x on those 2028 earnings, up from -3.4x today. This future PE is lower than the current PE for the GB Professional Services industry at 28.9x.
• 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 6.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent delays in major OEM platform and cycle plan decisions, particularly within the Volkswagen Group and Porsche, could prolong underutilization well below the targeted normalization in the second half. This could keep revenue structurally below the missing EUR 90 million to EUR 100 million per year the company associates with normal capacity utilization and limit any rebound in EBIT margins.
• If automotive OEMs respond to weak unit sales in China, tariff uncertainty and margin pressure by structurally tightening R&D budgets or internalizing more engineering work, the currently high open RFQ volume of more than EUR 4 billion may convert at lower rates. This could constrain long term revenue growth and depress earnings compared with expectations.
• Execution risk in the diversification strategy into aerospace, defense and medical technology, including potential delays in ramping the low triple digit million euro defense validation contract and in reaching the targeted 15 percent revenue share, could leave Bertrandt overexposed to a stagnating automotive business. This may limit the anticipated structural uplift in group net margins and earnings quality.
• Ongoing restructuring, workforce reductions of more than 15 percent in Germany and the removal of a management layer may impair Bertrandt’s ability to scale quickly when projects do start. The company could be forced either to turn away demand or to hire at higher cost in international hubs such as Mexico, Sweden, Morocco, Romania, Turkey and India, which could erode net margins and delay a sustainable return to positive earnings.
• Regulatory, legal and reputational risks, illustrated by the French antitrust fine of EUR 3.6 million and other one off items totaling EUR 12.7 million in the first nine months, may recur or expand as the company grows internationally. This could introduce unpredictable costs that weigh on profitability metrics such as EBIT and earnings per share even if topline revenue stabilizes.

Valuation

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

• The analysts have a consensus price target of €24.0 for Bertrandt 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 €32.0, and the most bearish reporting a price target of just €20.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €38.6 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €18.24, the analyst price target of €24.0 is 24.0% 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.