ARC1 Launch And Celebert Acquisition Will Redefine Kitchen Industry

Key Takeaways

• Planned acquisition and product launches, like ARC1 by Svane Køkkenet, are set to drive revenue growth through increased sales and consumer interest.
  
• Investments in production efficiency and deleveraging efforts will enhance profitability, allowing for further growth investments and better investor confidence.
  
• Decline in B2B sales, rising costs, and challenges in key markets threaten TCM Group's revenue and margin stability.

Catalysts

Engages in the manufacture and sale of kitchen and furniture products for bathrooms and storage in Denmark and internationally.

• The planned acquisition of the remaining 55% stake in Celebert, expected during the second half of 2025, is anticipated to bring significant revenue and earnings growth due to increased sales and cost synergies, directly boosting future revenue and profitability.
  
• The recent launch of new products, such as ARC1 by Svane Køkkenet, aims to redefine kitchen design using ceramic materials, which could lead to increased consumer interest and higher B2C sales, positively impacting revenue and gross margins.
  
• Investments in a new lacquering line, expected to be operational by mid-2025, are anticipated to resolve current production bottlenecks, potentially reducing overtime and external supplier costs, thereby improving net margins.
  
• TCM Group's ongoing deleveraging efforts and improved financial position, including a reduced leverage ratio from 4.08 to 2.5, create additional room for growth investments and dividend distribution, potentially enhancing future earnings and investor confidence.
  
• Potential recovery in the B2B project market, anticipated in the latter half of the year, combined with ongoing B2C growth, is expected to drive significant sales increases, boosting future revenue streams.

TCM Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TCM Group's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 6.9% in 3 years time.
• Analysts expect earnings to reach DKK 110.0 million (and earnings per share of DKK 10.4) by about March 2028, up from DKK 57.7 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 11.2x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the DK Consumer Durables industry at 17.5x.
• 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 7.88%, as per the Simply Wall St company report.

TCM Group Future Earnings Per Share Growth

Risks

• The decline in B2B sales and uncertainty regarding future B2B project growth indicate potential challenges in maintaining or increasing revenue from this segment. When visibility on project orders is low, this can negatively impact revenue projections.
  
• Increased production costs, particularly related to bottlenecks within lacquering capacity, may exert pressure on net margins. If these costs cannot be passed on to customers, profitability could be adversely affected.
  
• The inclusion of Celebert may necessitate the amortization of intangible assets, potentially affecting reported earnings despite the firm's strong EBIT margin, as such amortizations could reduce net income.
  
• The ongoing difficulties in the Norwegian market, coupled with low visibility for growth, present a risk to revenue growth and market stability in this significant geographical segment.
  
• Fluctuations in administrative expenses and relatively high costs related to employee bonuses and IT developments could diminish net margins, particularly if similar expenditures continue in the future without corresponding revenue growth.

Valuation

• The analysts have a consensus price target of DKK98.0 for TCM Group 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 DKK1.6 billion, earnings will come to DKK110.0 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of DKK73.2, the analyst price target of DKK98.0 is 25.3% 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.