Transformation Products Exceeding 32% Of Sales Will Drive Future Sustainability In Cash Business

Key Takeaways

• Prosegur's innovation in Cash and growth in Security and Alarms signal strong future revenue and margin expansion.
  
• ESG initiatives and credit facility extensions boost operational efficiency and financial flexibility, supporting sustainable income growth.
  
• The company's reliance on unstable markets and currency fluctuations, combined with strategic investments and external economic challenges, could impact revenue stability and profit margins.

Catalysts

Operates in the private security sector.

• Prosegur's focus on innovation and transformation in its Cash business is gaining more relevance, with transformation products exceeding 32% of total sales, which is a strong indication of future revenue growth and sustainability.
  
• The Security business is showing impressive growth with an organic revenue increase of 19% driven by volume-based strategies and the ability to pass inflation costs to prices, positively impacting overall revenue and EBITA margins.
  
• The Alarms business is experiencing significant growth, with a 10.5% increase in the client base and higher recurring cash flow, suggesting increased future earnings and cash flow.
  
• The strategic initiatives in the ESG master plan, such as reducing emissions and increasing green energy consumption, could improve operational efficiencies and enhance net margins over time.
  
• The refinancing and extension of credit facilities to February 2030 demonstrate increased financial flexibility and liquidity, which can lower interest expenses and support sustainable net income growth.

Prosegur Compañía de Seguridad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prosegur Compañía de Seguridad's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 3.1% in 3 years time.
• Analysts expect earnings to reach €162.5 million (and earnings per share of €0.18) by about May 2028, up from €78.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €227 million in earnings, and the most bearish expecting €98 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, down from 16.7x today. This future PE is lower than the current PE for the GB Commercial Services industry at 14.2x.
• 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 12.36%, as per the Simply Wall St company report.

Prosegur Compañía de Seguridad Future Earnings Per Share Growth

Risks

• The company's financial results were impacted by hyperinflation accounting, particularly in Argentina, affecting depreciation expenses and financial results. This reliance on a volatile economic environment could pose ongoing risks to revenue stability.
  
• The Security business demonstrated a decrease in operating cash flow due to increased working capital requirements from a deliberate strategy to boost sales. This could impact net margins if sales growth does not translate into sustainable profit margins.
  
• The Cash business faced challenges from the economic recession in Argentina and labor strikes in Germany. Though these are considered temporary, continued or recurring disruptions could negatively impact earnings.
  
• The depreciation of the Argentine peso and Brazilian real can reduce total sales, affecting overall revenue and profit margins in the Latin American region due to currency fluctuations.
  
• Significant investment in technology for CIPHER and management changes in AVOS to drive innovation and performance improvements could strain short-term earnings if expected benefits do not materialize promptly.

Valuation

• The analysts have a consensus price target of €2.292 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 €1.65.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.3 billion, earnings will come to €162.5 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 12.4%.
• Given the current share price of €2.46, the analyst price target of €2.29 is 7.1% lower. 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.