SolidAl Integration And High-Voltage Investments Will Expand Future Capabilities

Key Takeaways

• Expansion in the Solutions segment and acquisition integration are poised to enhance revenue and margins, driven by a high-voltage backlog and improved production capabilities.
  
• Sustainability efforts and investments in high-voltage facilities solidify market positioning and aim to boost future revenue capacity and efficiency.
  
• Integration risks with SolidAl, political uncertainties in the U.S., project execution, low-voltage segment weakness, and high investment costs could impact growth and earnings.

Catalysts

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

• NKT has expanded its capacity and capabilities, particularly in the Solutions segment, which is expected to drive future revenue growth as they continue to execute on their high-voltage order backlog and benefit from investments.
  
• The acquisition of SolidAl and the subsequent integration are expected to contribute positively to NKT's Applications business line, enhancing revenue and possibly improving net margins due to expanded production capabilities in medium-voltage power distribution.
  
• Investments in new high-voltage factories and production facilities in different locations, expected to be operational from 2027, are likely to increase revenue capacity and improve efficiencies, potentially boosting net margins in the long term.
  
• NKT's high backlog of €10.6 billion, primarily from European transmission system operators, offers solid revenue visibility and supports expectations for sustained earnings and profitability over the next few years.
  
• Progress on sustainability initiatives, including emission reductions and the switch to sustainable fuels for installation vessels, reinforces NKT's strategic positioning among environmentally-conscious clients, potentially enhancing revenue prospects and improving long-term value.

NKT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NKT's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.9% today to 6.2% in 3 years time.
• Analysts expect earnings to reach €260.4 million (and earnings per share of €4.82) by about May 2028, up from €225.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €298.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, up from 17.1x today. This future PE is lower than the current PE for the GB Electrical industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

NKT Future Earnings Per Share Growth

Risks

• The integration of the Portuguese power cable manufacturer, SolidAl, while progressing as planned, carries risks that could impact the expected synergies and growth if the integration does not continue smoothly, potentially affecting EBITDA margins.
  
• Political uncertainties, particularly regarding the U.S. administration's stance on electrification and offshore wind, could impact demand and NKT's revenue projections, especially given its current limited exposure in the U.S. market.
  
• Despite a robust order backlog, there are potential risks related to project execution and managing the associated risks, which are crucial to realizing value and could impact net earnings if not managed effectively.
  
• The continued weakness in the construction-exposed low-voltage segment could adversely impact organic growth and overall revenue, as shown by the negative impact on the Applications business line.
  
• The anticipated high level of investments required to support ongoing expansions and new projects may increase operational costs and could potentially strain free cash flow, affecting net earnings if the expected return on investment isn't realized promptly.

Valuation

• The analysts have a consensus price target of DKK576.979 for NKT 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 DKK750.0, and the most bearish reporting a price target of just DKK433.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.2 billion, earnings will come to €260.4 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of DKK534.5, the analyst price target of DKK576.98 is 7.4% 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.