Demerger And Panama Canal Contracts Will Streamline Core Operations

Key Takeaways

• Separate listing and focus on core operations may streamline costs and improve net margins.
  
• New contracts and technological advances promise future revenue growth and lower operational costs.
  
• The company's reliance on tariff increases and special jobs risks unsustainable revenue growth amid geopolitical and exchange rate uncertainties.

Catalysts

Provides port and terminal infrastructure services in Australia, Denmark, Argentina, Brazil, Egypt, the Netherlands, Panama, Oman, Sweden, the United Kingdom, Europe, the Americas, Asia, the Middle East, Africa, and internationally.

• The recent demerger from Maersk and separate listing can create an opportunity for Svitzer to focus on core operations and potentially streamline costs, positively impacting net margins.
  
• New operations started in Greece, Brazil, and Australia with big contracts coming on stream may lead to future revenue growth from increased global market presence.
  
• Significant contracts secured for Panama Canal and Oman LNG operations provide a pipeline for future revenue growth starting from mid-2025 and 2026 respectively.
  
• Introduction of the efficient TRAnsverse tug design, including the world's first battery-methanol tug, has the potential to lower operational costs and improve net margins through reduced fuel consumption and enhanced safety features.
  
• The tariff increases in Harbour and Terminal Towage could sustain or slightly improve net margins amid stable geopolitical conditions, predicting tariffs at or slightly above the CPI across countries.

Svitzer Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Svitzer Group's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 9.0% in 3 years time.
• Analysts expect earnings to reach DKK 638.4 million (and earnings per share of DKK 20.15) by about May 2028, up from DKK 377.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as DKK568.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 23.1x today. This future PE is lower than the current PE for the DK Infrastructure industry at 36.9x.
• 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 7.25%, as per the Simply Wall St company report.

Svitzer Group Future Earnings Per Share Growth

Risks

• The reliance on tariff increases rather than organic growth in Harbor Towage implies that future revenue growth is heavily dependent on successful negotiation, which may not be sustainable long-term if market conditions change unfavorably.
  
• The EBITDA growth and cash flow generation heavily rely on special jobs and new contracts; any downturn in securing such contracts could impact expected earnings negatively.
  
• The reduced CapEx in 2024, resulting from a lack of new significant contracts, may indicate a slowdown in future investments for growth, potentially impacting revenue and EBITDA growth in subsequent years.
  
• The geopolitical uncertainties and changing trade flows, such as tensions between the U.S. and China, pose a risk to global trade volumes, which could lead to reduced volume in Harbour Towage operations, impacting revenue.
  
• Potential fluctuations in exchange rates could affect reported revenue and earnings, especially given the significant international operations in volatile regions.

Valuation

• The analysts have a consensus price target of DKK298.75 for Svitzer 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 DKK7.1 billion, earnings will come to DKK638.4 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of DKK276.2, the analyst price target of DKK298.75 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.