Geopolitical Tensions and Digital Transformation Will Shape Long-Term Security Demand

Catalysts

About secunet Security Networks

secunet Security Networks provides cybersecurity solutions and secure infrastructure projects, focusing on serving government, defense, and enterprise markets across Europe and beyond.

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

• Although ongoing geopolitical tensions in Europe have increased demand for advanced cybersecurity solutions, the pace and structure of government budgets may lead to uncertain and uneven revenue recognition in the future. This may impact earnings predictability.
• While digital transformation initiatives such as the adoption of cloud infrastructure and Zero Trust architectures open new growth avenues, the shift to as-a-service models may compress margins in the short term as recurring revenue builds more slowly than traditional project revenues.
• Despite a strong basis in government and defense, further expansion into international markets remains challenged by regulatory barriers and local competition. This could potentially limit international revenue growth rates.
• Continued investment into post-quantum security upgrades demonstrates technology leadership. However, this also requires sustained research and development expenditure, which could pressure net margins before resulting in new profitable products, especially as standards and customer readiness still evolve.
• Platformization and the development of scalable product lines allow for operational leverage. However, headcount expansion and increased inventory levels to ensure timely delivery may temporarily raise working capital needs and impact short-term cash flow.

Assumptions

This narrative explores a more pessimistic perspective on secunet Security Networks 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 secunet Security Networks's revenue will grow by 7.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.4% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach €41.7 million (and earnings per share of €6.32) by about December 2028, up from €31.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €54.5 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 35.4x on those 2028 earnings, down from 37.1x today. This future PE is greater than the current PE for the GB IT industry at 25.3x.
• 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 6.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If international expansion efforts accelerate more successfully than anticipated, overcoming regulatory hurdles and local competition, the resulting growth in international revenue could contribute to higher overall revenue than currently expected.
• Should recurring revenue from as-a-service and cloud-based offerings increase more rapidly than forecasted, this would drive improved earnings predictability and potentially higher net margins sooner than assumed.
• If large government infrastructure and defense projects see faster than expected budget approvals or special public funds are allocated more quickly, this could lead to significant, unplanned top-line growth, surpassing the revenue expectations implied in a flat share price scenario.
• Advances in post-quantum and sovereign cloud technologies that are adopted faster than industry standards predict, including high demand for certified solutions, could enhance secunet’s technology leadership and spur product-driven revenue and net margin expansion.
• If the business sector and eHealth divisions continue their strong momentum due to structural demand and successfully navigate the shift toward as-a-service models, this may drive segment earnings materially above the base case.

Valuation

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

• The assumed bearish price target for secunet Security Networks is €188.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be €540.0 million, earnings will come to €41.7 million, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of €183.2, the analyst price target of €188.0 is 2.6% 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.