Proprietary Software Sales And Airbus Partnerships Will Drive Future Success

Key Takeaways

• Strategic transition towards proprietary software and SAP PLM Solutions is set to increase high-margin revenues, reducing dependency on third-party suppliers.
  
• Restructuring for operational efficiency and new contracts as a Tier 1 supplier for Airbus will enhance cost savings and revenue streams by 2026.
  
• Earnings are negatively affected by acquisition costs, office space issues, increased interest expenses, a bankruptcy stake, and market uncertainties.

Catalysts

Operates as an IT consultancy and software company that serves manufacturing and financial services industries in Germany, Austria, Switzerland, North America, Romania, France, Belgium, the Netherlands, and China.

• The company's strategic shift towards increasing its proprietary CENIT software sales is anticipated to boost revenues significantly, as this segment boasts higher margins due to no third-party supplier dependency.
  
• CENIT's expanded role as a Tier 1 supplier for Airbus is expected to enhance revenue streams, as the company positions itself to take on new and larger contracts by 2026.
  
• The company's restructuring initiative, which includes reducing personnel to optimize operations, is projected to yield cost savings of €5 million to €5.5 million by 2026, thereby positively impacting net margins and overall earnings.
  
• Organic growth is emphasized, with a focus on achieving at least a 5% growth excluding acquisitions, driven by increased sales activities and a solid order backlog that expanded by 41%, likely to drive future revenue growth.
  
• CENIT's focus on SAP PLM Solutions and partnerships with large clients will likely result in higher-margin revenues given its proprietary software's significant role in upcoming projects and integration strategies.

CENIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CENIT's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.3% today to 5.5% in 3 years time.
• Analysts expect earnings to reach €13.6 million (and earnings per share of €1.02) by about July 2028, up from €-4.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from -13.7x today. This future PE is lower than the current PE for the GB Software industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

CENIT Future Earnings Per Share Growth

Risks

• The company's earnings were negatively impacted by costs associated with acquisitions and purchase price allocations, which diluted the success of their M&A activities and lowered net earnings.
  
• CENIT faces challenges in subleasing unused office space, leading to a provision and impacting net margins with an additional cost of €425,000.
  
• Interest expenses on their syndicated loan increased significantly, affecting net earnings and resulting in a financial negative outcome.
  
• Bankruptcy of a financial stake in Ascon Holdings required a full depreciation of its shares, further impacting net earnings and resulting in a negative earnings per share.
  
• Market difficulties, such as reduced activities with Airbus and volatility in the U.S. market, have led to uncertainty in revenue growth projections for the coming year.

Valuation

• The analysts have a consensus price target of €16.425 for CENIT 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 €19.0, and the most bearish reporting a price target of just €14.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €246.5 million, earnings will come to €13.6 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of €7.88, the analyst price target of €16.42 is 52.0% 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.