Rising Competition Will Squeeze Margins Even As Capacity Expansions Offer Slight Relief

Key Takeaways

• Intensifying competition and increased supplier prequalification are reducing pricing power and squeezing margins, particularly in key European power grid markets.
  
• Structural challenges and investment-driven costs are leading to persistent margin pressure, earnings volatility, and uncertainty in long-term revenue visibility.
  
• Strong order backlog, industry tailwinds, capacity expansions, and HVDC expertise position NKT for sustained growth, margin improvement, and resilience to market or cost pressures.

Catalysts

Designs, manufactures, and installs low, medium, and high voltage power cable solutions in Denmark.

• Despite strong recent growth and a robust multi-year order backlog, NKT's revenue visibility beyond 2027 appears increasingly uncertain, as market commentary indicates the high voltage cable sector may shift toward a more balanced supply-demand dynamic in the 2030s, potentially capping future top-line growth as new industry capacity comes online.
  
• Intensifying competitive pressures, particularly in Central Europe for both medium voltage and power grid segments, are already eroding margins, while large utility customers are prequalifying more suppliers in framework agreements, reducing NKT's pricing power and putting persistent downward pressure on operating margins.
  
• Weakness in the construction-exposed and low voltage cable segments is structural rather than cyclical, with subdued volumes and prices likely to persist well into 2025, resulting in ongoing margin dilution across the Applications division and weighing on group-level profitability.
  
• Ongoing capacity expansions and large-scale investments are driving elevated capex and operating expenses, with management acknowledging EBITDA dilution from ramp-up costs and negative free cash flow expected through 2026, keeping return on capital under pressure as new assets come online.
  
• The company's dependence on lumpy project business creates significant earnings volatility, and any future delays, cancellations, or regulatory setbacks in permitting large grid or renewables projects-exacerbated by rising interest rates and tighter infrastructure funding-could lead to sudden drops in revenue and profitability, jeopardizing long-term earnings visibility.

NKT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NKT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NKT's revenue will decrease by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.9% today to 7.8% in 3 years time.
• The bearish analysts expect earnings to reach €251.7 million (and earnings per share of €4.53) by about August 2028, up from €234.0 million today. The analysts are largely in agreement about this estimate.
• 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 13.8x on those 2028 earnings, down from 17.1x today. This future PE is lower than the current PE for the GB Electrical industry at 22.1x.
• 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 6.72%, as per the Simply Wall St company report.

NKT Future Earnings Per Share Growth

Risks

• NKT's €10.7 billion high-voltage backlog and over €3.5 billion in additional booking commitments provide strong revenue and earnings visibility for several years, reducing the likelihood of a sudden or prolonged deterioration in top-line performance.
  
• Industry tailwinds such as the push for electrification, grid modernization, and offshore wind integration are expected to sustain high demand for NKT's advanced cable solutions, supporting long-term organic revenue growth and mitigating risks of market contraction.
  
• Significant capacity expansion projects-such as the new Karlskrona factory and increased production in Sweden and the Czech Republic-are on track to deliver operational leverage and enhanced efficiency, which could drive higher margins and EBITDA as these assets become operational from 2027 onwards.
  
• NKT's positioning with strong technological capabilities in high-voltage direct current (HVDC) systems gives it a competitive advantage in winning complex, high-value projects with European TSOs and energy majors, which supports premium pricing and the potential for sustained margin improvement.
  
• Strategic actions such as the long-term low-carbon aluminium supply agreement and a robust financial position with €1 billion in net cash enable NKT to invest in sustainable solutions and manage cost pressures effectively, positioning it well for future earnings resilience and reduced margin volatility.

Valuation

• The assumed bearish price target for NKT is DKK403.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NKT'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 DKK843.0, and the most bearish reporting a price target of just DKK403.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.2 billion, earnings will come to €251.7 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of DKK557.5, the bearish analyst price target of DKK403.0 is 38.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.