Involvement In VR And Spatial Computing Will Open New Markets But Declining Margins May Impact Earnings

Key Takeaways

• Strategic investments in IP, platforms, and spatial computing are expected to drive future revenue growth, particularly in U.S. operations and healthcare sectors.
  
• Cost-saving initiatives and strong performance in Trifork Labs aim to enhance net margins and earnings through operational efficiency and investment returns.
  
• Trifork Group faces stagnant revenue, declining margins, and customer concentration risks, compounded by cost-cutting measures and exposure to struggling industries.

Catalysts

Provides information technology and other business services in Switzerland, Denmark, the United Kingdom, the Netherlands, the United States, and internationally.

• Trifork Group is heavily investing in IP and platform development, which is expected to enhance future revenue through higher-margin product offerings and recurring revenue streams associated with proprietary technology.
  
• The rebound and significant growth in the company’s U.S. operations, driven by collaborations with SAP and Apple and the introduction of smart enterprise solutions, are expected to substantially increase revenue in the coming years.
  
• Trifork’s involvement in spatial computing and the burgeoning interest among large enterprises, particularly with innovative VR applications, is expected to drive future revenue growth, particularly in safety and healthcare sectors.
  
• The company’s strategic cost-saving initiatives, including reduction in senior management salaries and increased operational efficiency, are expected to positively impact net margins by reducing overall costs by €10 million annually.
  
• Strong performance and valuation adjustments in Trifork Labs indicate a robust pipeline for future growth opportunities, potentially enhancing earnings through increased investment returns and potential monetization events.

Trifork Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trifork Group's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 5.9% in 3 years time.
• Analysts expect earnings to reach €15.3 million (and earnings per share of €0.78) by about February 2028, down from €17.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €17.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 11.3x today. This future PE is lower than the current PE for the DK IT industry at 29.0x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Trifork Group Future Earnings Per Share Growth

Risks

• Stagnant Revenue: Trifork Group expects to end the year with revenue similar to 2023, indicating difficulties in sustaining growth, which could impact future revenue expectations.
  
• Declining Margins: There was a noted decrease in EBITDA margins from 15.2% to 12%, largely attributed to customer budget cuts and increased operational costs, affecting net margins.
  
• Customer Concentration Risk: Some of the largest accounts have reduced their engagement with Trifork due to economic pressures, which poses a risk to both revenue and earnings if this trend continues or accelerates.
  
• Cost-Saving Measures and Organizational Challenges: The company is implementing cost-cutting measures, including reducing salaries and slowing hiring, which could potentially impact its ability to grow and innovate, thereby affecting earnings.
  
• Market Dependence and Vulnerability: Trifork is significantly exposed to market conditions, particularly in industries like automotive and construction, which are currently underperforming; this exposure introduces risks to revenue and could lead to underperformance if these sectors do not recover.

Valuation

• The analysts have a consensus price target of DKK111.667 for Trifork 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 DKK130.0, and the most bearish reporting a price target of just DKK100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €259.0 million, earnings will come to €15.3 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of DKK77.4, the analyst price target of DKK111.67 is 30.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.