Rising Geopolitical Tensions Will Drive Strong Demand For Sovereign Cybersecurity And Secure Cloud Solutions

Catalysts

About secunet Security Networks

secunet Security Networks provides high assurance cybersecurity, secure cloud and defense grade communication solutions primarily for European governments and critical institutions.

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

• Escalating geopolitical tensions and rising defense budgets in Germany and across NATO are accelerating demand for sovereign, certified cybersecurity and communication infrastructures, supporting sustained double digit revenue growth and higher visibility on long term earnings.
• Rapid digitalization of borders and public administrations, including the European entry exit system and digital euro related projects, positions secunet as a leading provider of specialized secure identity and border control platforms, driving high margin project revenues and long dated service income.
• Shift of governments and critical industries toward highly secure cloud architectures, including Zero Trust and beyond, underpins growing adoption of secunet’s sovereign cloud stack and SINA ecosystem, lifting recurring and repeating revenue and supporting structurally higher EBIT margins.
• Early lead in post quantum ready encryption and certified high security products for NATO and EU institutions creates a technological moat that should translate into premium pricing power, stable gross margins and resilient earnings as confidentiality requirements tighten globally.
• Platformization of the portfolio, scalable architectures and disciplined cost management enable operating leverage as order backlog and international business expand, supporting faster EBIT growth than revenue and continued improvement in cash generation.

Assumptions

This narrative explores a more optimistic perspective on secunet Security Networks compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming secunet Security Networks's revenue will grow by 11.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.4% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach €54.8 million (and earnings per share of €8.26) by about December 2028, up from €31.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €41.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 37.1x on those 2028 earnings, up from 35.7x today. This future PE is greater than the current PE for the GB IT industry at 25.5x.
• The bullish 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 6.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy reliance on German public sector and parliamentary budget decisions, including late approvals and multi step sign offs for large projects above EUR 20 million, creates structural volatility in order timing that could delay project execution and flatten revenue growth and EBIT progression over time.
• The shift toward as a service and cloud based delivery, illustrated by slower than expected uptake in eHealth services after legacy connectors were prolonged, risks a more protracted transition phase in which up front license sales decline faster than recurring revenues scale, compressing net margins and near term earnings growth.
• Platformization and the need to keep pace with rapid innovation in Zero Trust, sovereign cloud and post quantum cryptography require sustained investment in talent and R&D. If hiring and CapEx must accelerate more than management currently signals, operating expenses could rise faster than sales and erode EBIT margins.
• Ambitions to expand further across Europe, EU institutions and NATO increase exposure to more competitive international tenders and differing regulatory regimes. If secunet fails to win enough non domestic contracts, its growth mix could stay skewed to Germany and limit long term revenue diversification and earnings resilience.
• Building inventory ahead of confirmed orders to secure year end deliveries, while effective in the recent budget delay, structurally elevates working capital needs and heightens the risk of demand mismatches, which could weaken operating cash flow and constrain the company’s ability to fund growth without pressuring profitability.

Valuation

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

• The assumed bullish price target for secunet Security Networks is €258.0, which represents up to two standard deviations above the consensus price target of €220.6. This valuation is based on what can be assumed as the expectations of secunet Security Networks's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €258.0, and the most bearish reporting a price target of just €188.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €599.4 million, earnings will come to €54.8 million, and it would be trading on a PE ratio of 37.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €176.2, the analyst price target of €258.0 is 31.7% 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.