Acquisitions And Operational Improvements Will Improve Future Performance

Key Takeaways

• Acquisitions and expansion into innovative services could enhance revenue and improve margins, driven by synergies and new market demand.
  
• Efficiency improvements and ERP implementations across segments aim for cost reductions, potentially boosting net margins and overall earnings growth.
  
• Declining profitability and challenging market conditions in Sweden and Finland could hinder revenue and growth opportunities across key business segments.

Catalysts

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

• The acquisition of a recycled pallet business in Finland, pending competition authority approval, is expected to enhance Lassila & Tikanoja's recycling business, potentially increasing future revenues and improving net margins due to synergies and expanded service offerings.
  
• Ongoing improvements in Facility Services Finland, including efficiency measures and ending unprofitable customer contracts, signal potential for continued growth in adjusted operating profit, thus positively impacting net margins and earnings.
  
• The implementation of new ERP systems in Environmental and Industrial Services aims to increase operational efficiency, which could lead to cost reductions and improved net margins. This is expected to start delivering results in the second half of next year.
  
• Expansion into data-driven cleaning and other smart services points towards increased demand and new customer acquisition, potentially driving future revenue growth due to these innovative, higher-margin services.
  
• Turnaround efforts in Facility Services Sweden, including management changes and shared best practices from Finland, are aimed at eventually improving the segment’s financial performance, which could positively impact overall company earnings if successful.

Lassila & Tikanoja Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lassila & Tikanoja Oyj's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.4% in 3 years time.
• Analysts expect earnings to reach €35.4 million (and earnings per share of €0.94) by about February 2028, up from €24.8 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 11.9x on those 2028 earnings, down from 13.2x today. This future PE is lower than the current PE for the GB Commercial Services industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Lassila & Tikanoja Oyj Future Earnings Per Share Growth

Risks

• The demand for recycling and waste management services is being negatively impacted by a challenging economic environment, especially due to continued municipalization, which could affect future revenues.
  
• Sales in the Facility Services business in Sweden have declined significantly, and the turnaround is taking longer than expected, which may negatively impact overall revenue and profitability.
  
• The construction industry in Finland is experiencing a slowdown, particularly in new projects, which is not expected to improve in the next 6 to 12 months, potentially affecting revenues from environmental construction services.
  
• Return on capital employed has decreased, influenced by a drop in operating profitability and capital efficiency, partly due to poor performance in Facility Services Sweden, which could affect overall company earnings.
  
• The company's capital expenditures have decreased, especially in Environmental Services, which could limit growth opportunities or efficiency improvements, potentially affecting long-term profitability.

Valuation

• The analysts have a consensus price target of €9.0 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 €803.9 million, earnings will come to €35.4 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €8.58, the analyst price target of €9.0 is 4.7% 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.