Swedish Warehouse Completion Will Improve Operational Efficiencies By 2026

Key Takeaways

• Investment in automation and digitalization is set to enhance operational efficiencies and boost EBITDA margins over time.
  
• Climate & Energy segment's growth from air-to-water heat pumps is poised to drive revenue with positive momentum.
  
• Revenue and profitability are challenged by underperforming segments, declining EBITDA margins, economic uncertainties, and inability to offset rising costs amid competitive pressures.

Catalysts

Operates as a sourcing and services company in electrical, heating and plumbing, ventilation, and climate and energy solutions in the Danish, Swedish, Norwegian, and Dutch markets.

• The company's investment in automation and digitalization, including the completion of the Swedish warehouse by 2026 and other AutoStore investments, could lead to increased operational efficiencies and higher EBITDA margins over time.
  
• The Climate & Energy segment, particularly through the adoption and sales of air-to-water heat pumps supported by a new subsidiary scheme in Denmark, is expected to drive revenue growth with continued positive momentum in 2025.
  
• Potential growth in the Solar Polaris segment, with more large PV park projects and favorable market conditions due to competitors exiting, could boost revenue, albeit with lower-than-average margins.
  
• Reduction in the company's net working capital from 16.8% in 2023 to 15% in 2024 indicates improving operational efficiencies, which may positively impact earnings through better cash flow management.
  
• Expected improvement in the Industry and Trade segments, especially with positive growth in special sales within Trade and stagnant yet positive outlook in subsegments of Industry, could contribute to a gradual increase in revenue as market conditions stabilize.

Solar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solar's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 2.6% in 3 years time.
• Analysts expect earnings to reach DKK 329.5 million (and earnings per share of DKK 44.9) by about February 2028, up from DKK 151.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 12.8x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 13.5x.
• 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 7.82%, as per the Simply Wall St company report.

Solar Future Earnings Per Share Growth

Risks

• The revenue growth was below expectations in 2024, with a decline from DKK 13 billion in 2023 to DKK 12.2 billion, indicating ongoing challenges in achieving projected sales across various segments. This impacts revenue negatively.
  
• Several customer segments, including Climate & Energy and Installation, experienced negative growth, with significant declines in strategic areas, affecting the company’s ability to generate revenue and maintain profit margins.
  
• There is a decrease in EBITDA margin from 6.5% in 2023 to 4.6% in 2024, which was attributed to lower effectiveness of concept gains and price effects, impacting earnings negatively.
  
• The unpredictability of the macroeconomic recovery and stagnant growth expectations for 2025 across multiple markets pose ongoing risks to future revenue and earnings stability.
  
• Persistent price pressures, salary inflation, and inability to pass on new costs to customers due to competitive constraints are likely to compress net margins further, thereby affecting profitability.

Valuation

• The analysts have a consensus price target of DKK330.0 for Solar based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK12.7 billion, earnings will come to DKK329.5 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of DKK265.5, the analyst price target of DKK330.0 is 19.5% 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.