Data Migration Recovery And SAP Contracts Expected To Support Future Performance

Key Takeaways

• Strategic capacity adjustments and recent contract wins in key regions are set to enhance NNIT's operating profit and earnings.
  
• Recovery in data migration, improved margins in Asia, and strong market positioning should drive revenue and profitability growth.
  
• Slow recovery and postponed projects in key markets, alongside price pressures, challenge NNIT's revenue growth and profitability, impacting future financial aspirations.

Catalysts

Provides information technology services to life sciences, public, and private sectors in Denmark, Europe, the United States, and Asia.

• NNIT's slow recovery in the data migration business, particularly in the U.S., is anticipated to improve as their backlog and pipeline strengthen. Once the recovery takes hold, this should positively impact revenue growth in future quarters.
  
• The company has made strategic capacity adjustments of approximately 5% to 10% in the U.S. and Europe to better align with current demand, which is expected to enhance operating profit margins moving forward.
  
• NNIT's recent contract wins, including their largest-ever contract in the U.S. and a critical public sector SAP project in Denmark, are expected to drive significant revenue growth and positively influence earnings in the upcoming quarters.
  
• Turnaround initiatives in Region Asia have led to improved gross margins, and this trend is expected to continue, contributing to overall profitability improvements for the company.
  
• Despite a moderate slowdown in the Life Sciences market, NNIT aims to outpace market growth due to its strong market positioning, and this is expected to support revenue growth and net margins over the longer term.

NNIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NNIT's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 8.8% in 3 years time.
• Analysts expect earnings to reach DKK 205.7 million (and earnings per share of DKK 8.24) by about February 2028, up from DKK 73.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting DKK236 million in earnings, and the most bearish expecting DKK168 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 26.9x today. This future PE is lower than the current PE for the GB Healthcare Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

NNIT Future Earnings Per Share Growth

Risks

• The slow recovery in the data migration business, especially in the U.S. where it was a significant revenue contributor, has led to a steep decline in revenue, impacting overall earnings.
  
• The life sciences market is experiencing a slowdown, with projects postponed or put on hold, leading to decreased revenue and potentially affecting net margins.
  
• Price pressures and macroeconomic challenges in Asia, particularly China, have led to hesitant customer behavior and withdrawal from low-profitability projects, negatively impacting revenues and gross margins.
  
• Capacity adjustments and rightsizing initiatives could lead to challenges in scaling up quickly if demand rebounds sharply, potentially impacting future revenue growth and net margins if not managed effectively.
  
• Market expectations for growth have been lowered, which can impact longer-term financial aspirations and contradict NNIT's goal to consistently outgrow the market, affecting future revenue forecasts and profitability.

Valuation

• The analysts have a consensus price target of DKK103.333 for NNIT 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 DKK140.0, and the most bearish reporting a price target of just DKK70.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK2.3 billion, earnings will come to DKK205.7 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of DKK79.0, the analyst price target of DKK103.33 is 23.5% 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.