Transformation Products In Cash Business Will Support Future Profitability

Key Takeaways

• Strategic growth in the Security business and operational leverage are enhancing margins and profitability through increased efficiencies and sales volumes.
  
• Effective diversification efforts, focusing on transformation products and strong cash flow management, indicate sustained revenue growth and reduced financial leverage.
  
• Currency depreciation and high restructuring costs in specific markets challenge Prosegur's profitability and growth, despite efforts to enhance operational efficiencies.

Catalysts

Operates in the private security sector.

• The expansion of Prosegur's sales, notably across various geographies with a 6.4% year-on-year increase driven largely by organic growth, suggests future potential revenue growth as this trend continues.
  
• Strategic growth in their Security business, with revenues increasing by 33% organically and strong operational leverage through volume-based strategies, could improve EBITDA and margins due to increased efficiencies and higher sales volumes.
  
• The restructuring efforts in the Australian operation and anticipated synergies, alongside consolidation of growth in the ForEx business, are expected to offset current costs and enhance EBITDA margins in the future.
  
• The successful increase in transformation products in the cash business, comprising 32% of total sales, indicates a drive towards effective product diversification likely to boost future profit margins and sustain revenue growth.
  
• Prosegur's focus on strong cash flow generation through improved working capital management and reduced days sales outstanding (DSO) sets a positive trajectory for strengthening net income and reducing financial leverage.

Prosegur Compañía de Seguridad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prosegur Compañía de Seguridad's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 2.0% in 3 years time.
• Analysts expect earnings to reach €104.0 million (and earnings per share of €0.19) by about February 2028, up from €66.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €147 million in earnings, and the most bearish expecting €90 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the GB Commercial Services industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.95%, as per the Simply Wall St company report.

Prosegur Compañía de Seguridad Future Earnings Per Share Growth

Risks

• Prosegur's cash business profitability is impacted by the restructuring costs in the Australian operation and setup costs in the ForEx business, which could slow down EBITDA growth and affect net margins.
  
• The depreciation of the Argentine peso and the Brazilian real negatively impacts EBITDA, which could lead to lower net earnings if currency fluctuations continue.
  
• There is a high tax rate at 47.4% which, despite an increase in EBIT, only led to a modest increase in net income, potentially limiting net earnings growth.
  
• Despite a reduction in the net debt-to-EBITDA ratio, net financial debt in absolute terms remains high at €1.5 billion, which could impact future cash flows and financial flexibility.
  
• The alarm business requires high acquisition costs, and while these are currently managed through efficiencies, any increase could compress margins and impact net earnings.

Valuation

• The analysts have a consensus price target of €2.251 for Prosegur Compañía de Seguridad 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 €3.13, and the most bearish reporting a price target of just €1.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.2 billion, earnings will come to €104.0 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 13.9%.
  
• Given the current share price of €1.93, the analyst price target of €2.25 is 14.4% 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.