Expanding Capacity In Karlskrona And Cologne And SolidAl Integration Will Drive Revenue Growth And Boost Margins

Key Takeaways

• Strategic capacity expansion and integration efforts are set to significantly enhance revenue growth, operational efficiency, and market presence in Europe.
  
• Strong order backlog and growing demand for high-voltage production provide robust support for sustained revenue and earnings growth.
  
• Execution challenges in legacy projects, integration costs, and high investments are straining NKT's profitability, cash flow, and revenue growth.

Catalysts

Develops, manufactures, and markets cables, accessories, and solutions in Denmark and internationally.

• NKT's ongoing investment in expanding capacity, such as the €1 billion investment program in Karlskrona and other sites, is expected to drive significant revenue growth as new production capabilities come online from 2025 to 2027.
  
• The successful integration of SolidAl and expected EBITDA synergies of €7 million by 2026 are anticipated to improve net margins and enhance the company's medium and high-voltage segment presence in southern Europe.
  
• The robust high-voltage order backlog of €11 billion, with good earnings visibility for the rest of the decade, supports strong revenue and earnings growth, providing a secure foundation for future financial performance.
  
• The planned expansion of production capacity in Cologne and other strategic investments are expected to enhance operational efficiency and margins, contributing positively to both revenue and net margins.
  
• The demand for high-voltage production driven by DC technology and the favorable supply-demand balance expected throughout this decade are likely to drive revenue growth and support NKT’s market share retention.

NKT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NKT's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 6.8% in 3 years time.
• Analysts expect earnings to reach €274.4 million (and earnings per share of €5.1) by about December 2027, up from €199.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €194.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 141.8x on those 2027 earnings, up from 18.5x today. This future PE is greater than the current PE for the GB Electrical industry at 23.8x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.85%, as per the Simply Wall St company report.

NKT Future Earnings Per Share Growth

Risks

• NKT's profitability was negatively impacted by risk provisions related to legacy onshore projects, indicating potential execution challenges, which could affect future net margins.
  
• The integration process of SolidAl, while progressing as expected, involves ongoing associated costs, which may temporarily affect earnings and margins during the integration period.
  
• NKT's free cash flow was negative due to a combination of working capital fluctuations and high investments, potentially indicating cash flow management risks in the short term.
  
• The construction market, particularly in the construction segment of Applications, remains subdued, putting pressure on revenue growth within this segment.
  
• The heavy construction phase at Karlskrona and the high planned CapEx for coming years could strain financial resources if projects face delays or cost overruns, potentially impacting profitability and cash flow.

Valuation

• The analysts have a consensus price target of €619.22 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 €730.0, and the most bearish reporting a price target of just €508.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €4.0 billion, earnings will come to €274.4 million, and it would be trading on a PE ratio of 141.8x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of €513.0, the analyst's price target of €619.22 is 17.2% 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.