Ongoing IT Investments Will Transform Operations By Mid-2025

Key Takeaways

• Organic growth in healthcare and utilities drives future revenue, overcoming economic challenges, while strategic share buybacks reflect belief in undervaluation.
  
• Expanding in the Middle East and India aims to boost market growth, leveraging local insights for revenue and margin improvements.
  
• Heavy reliance on Germany and challenges in key industries and segments could hinder revenue growth and profitability amid macroeconomic and market uncertainties.

Catalysts

Provides IT services in Germany, Austria, Switzerland, and internationally.

• Adesso's organic growth, particularly in the healthcare and utility sectors, is a key driver for future revenue increases, as seen by the substantial growth percentages in these areas despite overall economic challenges.
  
• The improvement in capacity utilization and increasing daily rates are expected to enhance net margins, as more effective use of resources leads to better profitability outcomes.
  
• Strategic share buybacks indicate management's belief in undervaluation, potentially boosting earnings per share (EPS) as the total number of shares decreases.
  
• International expansion efforts, particularly in Middle Eastern markets and increasing capacity in India, aim to secure market growth and may contribute to both revenue and margin improvements by leveraging local insights and cost structures.
  
• Ongoing investments in IT solutions are anticipated to complete by mid-2025, with expectations of transforming this segment into a profitable contributor, positively impacting EBITDA.

adesso Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming adesso's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 2.6% in 3 years time.
• Analysts expect earnings to reach €47.1 million (and earnings per share of €7.25) by about February 2028, up from €4.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €64 million in earnings, and the most bearish expecting €32.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 131.1x today. This future PE is greater than the current PE for the GB IT industry at 19.5x.
• 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 7.01%, as per the Simply Wall St company report.

adesso Future Earnings Per Share Growth

Risks

• The reliance on Germany for a significant portion of business (83% of revenue) may pose a risk due to macroeconomic challenges in the region, potentially affecting future revenue growth and geographical diversification.
  
• Slower growth in key industries such as insurance, banking, and retail, where growth was below expectation, may indicate challenges in sustaining high growth rates, impacting overall revenue and sector profitability.
  
• The underperformance in the IT Solutions segment, which continued to generate losses, could contribute to ongoing margin pressures and affect net earnings until the turnaround expected in mid-2025 is realized.
  
• The potential uncertainty and delays in signing significant licensing deals due to the volatile economic and political environment could hinder revenue growth projections and affect earnings, especially in a cautious market landscape.
  
• The company's need to enhance recruiting efforts to maintain its growth trajectory may lead to increased personnel costs, impacting net margins if the growth in daily rates does not offset these expenses.

Valuation

• The analysts have a consensus price target of €127.333 for adesso 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 €162.0, and the most bearish reporting a price target of just €85.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.8 billion, earnings will come to €47.1 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €93.8, the analyst price target of €127.33 is 26.3% 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.