New Contracts With Munich Airport And Forca Will Strengthen Future Outlook

Key Takeaways

• The revamped go-to-market strategy and key contract wins are set to boost revenue and margin expansion by leveraging partnerships and platform utilization.
  
• Strategic restructuring and focus on high-margin segments aim to enhance profitability, while a strong balance sheet supports potential acquisitions to bolster growth.
  
• Slower project ramp-up, high attrition, and deferred revenue targets pose risks to Netcompany's growth, profitability, and investor confidence.

Catalysts

Provides business critical IT solutions to private and public customers in Denmark, Norway, the United Kingdom, the Netherlands, Greece, Belgium, Luxembourg, and internationally.

• Implementation of the new go-to-market strategy initiated in early 2023 is expected to continue driving revenue growth, in particular by increasing partnerships within strategic verticals and leveraging existing platforms. This has already led to significant contract wins in 2024, which should positively impact future revenue.
  
• The company has secured several high-profile contracts, such as with Munich Airport and Forca, which will likely contribute to revenue growth and margin expansion in the coming years. These contracts indicate the potential for increased utilization of Netcompany's platforms and solutions.
  
• The restructuring and divestment of non-strategic markets in Netcompany-Intrasoft are expected to enhance overall profitability. By focusing on regions and segments that yield higher margins, Netcompany aims to achieve a better-adjusted EBITDA margin, supporting earnings growth.
  
• Strong free cash flow and maintaining a healthy balance sheet provide Netcompany with the flexibility to potentially engage in strategic acquisitions, focusing on targets with significant IP and products that could enhance revenue and margins.
  
• Despite current challenges, particularly in the UK public sector due to election-related spending pauses, there is an expectation of recovery and unlocking of budgets which could drive future revenue growth.

Netcompany Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Netcompany Group's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 11.6% in 3 years time.
• Analysts expect earnings to reach DKK 969.6 million (and earnings per share of DKK 21.74) by about April 2028, up from DKK 470.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting DKK1.1 billion in earnings, and the most bearish expecting DKK852 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 25.9x today. This future PE is lower than the current PE for the DK IT industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 4.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Netcompany Group Future Earnings Per Share Growth

Risks

• The slower-than-expected ramp-up of projects in the U.K., especially within the public sector, post-election has impacted revenue and may continue to do so, impacting growth and earnings expectations.
  
• The margin contraction in Norway due to increased business development and tender activities, which led to a negative EBITDA margin in Q4, poses a risk to profitability if similar activities continue without yielding substantial revenue.
  
• The divestment of nonstrategic markets within Netcompany-Intrasoft reduced revenue growth expectation for 2025 and beyond, posing a risk to achieving previously projected revenue targets.
  
• High attrition rates (18.1%) compared to the previous year could lead to increased recruitment and training costs, which may affect net margins if attrition continues to rise.
  
• The decision not to initiate a new share buyback program despite strong cash flow and the deferral of revenue targets to 2027 indicate potential uncertainties in revenue generation and cash distribution, which may impact investor confidence and shareholder returns.

Valuation

• The analysts have a consensus price target of DKK320.571 for Netcompany Group 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 DKK359.0, and the most bearish reporting a price target of just DKK300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK8.3 billion, earnings will come to DKK969.6 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of DKK259.0, the analyst price target of DKK320.57 is 19.2% 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.