Efficiency Measures And Circular Economy Separation Will Streamline Operations

Key Takeaways

• Efficiency improvements and demerger could enhance operating margins and profitability through cost reduction and focused strategies in the Circular Economy Business.
  
• Strong performance in Facility Services and ERP system rollout provide a foundation for sustained earnings growth and improved net margins.
  
• Operational and economic challenges in the Circular Economy Business and Facility Services threaten revenue stability, while strategic changes carry short-term execution risks.

Catalysts

A service company, provides environmental management, and property and plant support services in Finland, Sweden, and internationally.

• The ongoing efficiency improvement program has significantly reduced fixed costs, decreasing them by €5 million from end of '23 to end of '24 and further by €1 million in Q1 '25, which is likely to enhance operating margins and profitability moving forward.
  
• The partial demerger and associated separation of Circular Economy Business from other operations is expected to streamline operations and potentially enhance profitability by allowing targeted strategies and management focus, thus impacting operating profit positively.
  
• Despite challenges in the construction sector, there are signs of potential market recovery in the second half of '25, particularly concerning material flows in the Circular Economy Business, which could lead to improved revenues if realized.
  
• Strong performance and profitability improvements in Facility Services Finland coupled with future potential for further enhancements provide a foundation for sustained earnings growth and improved net margins.
  
• The ERP system rollout, although costly, is aimed at long-term cost savings and efficiency gains, which should positively impact operating margins and earnings once fully implemented.

Lassila & Tikanoja Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lassila & Tikanoja Oyj's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 6.2% in 3 years time.
• Analysts expect earnings to reach €49.5 million (and earnings per share of €0.95) by about May 2028, up from €2.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, down from 144.5x today. This future PE is lower than the current PE for the GB Commercial Services industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Lassila & Tikanoja Oyj Future Earnings Per Share Growth

Risks

• The Circular Economy Business experienced a 5% decrease in net sales due to slow economic conditions, particularly in the construction sector, which could impact future revenue stability and growth.
  
• The Facility Services Business in Finland faced revenue declines partly due to the mild winter, impacting net revenue, even though profitability improved through efficiency measures.
  
• The Circular Economy Business is subject to high levels of market uncertainty, with low material flows and dependence on construction sector recovery, posing risks to revenue consistency.
  
• The ERP rollout in the Circular Economy Business, while necessary, adds extra operating costs that may impact short-term profit margins and earnings if not managed effectively.
  
• The planned demerger, although beneficial in potential long-term strategic reallocation, carries execution risks that could disrupt operations and affect revenue streams in the short term.

Valuation

• The analysts have a consensus price target of €10.0 for Lassila & Tikanoja Oyj 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 €801.4 million, earnings will come to €49.5 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of €9.46, the analyst price target of €10.0 is 5.4% 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.