The Demerger Will Unlock Shareholder Value And Strengthen Focus On Circular Economy

Key Takeaways

• The demerger into two listed companies aims to unlock shareholder value by enhancing focus and boosting revenue and earnings growth.
  
• Strategic initiatives, including cost efficiencies and system upgrades, are expected to improve profitability and market expansion capabilities.
  
• Uncertainty from the demerger, new municipal tendering, and operational challenges can strain revenue growth, profit margins, and overall earnings short-term.

Catalysts

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

• The ongoing demerger process, which will separate Lassila & Tikanoja into two distinct listed companies focused on circular economy and facility services, is expected to unlock value for shareholders. This strategic move is anticipated to enhance operational focus and potentially improve revenue and earnings growth for each independent business segment.
  
• The circular economy business sector is well-positioned to capitalize on megatrends, with multiple growth avenues and a resilient business model proven by consistent earnings growth from 2020 to 2024. This growth is likely to positively impact revenue and earnings in the future.
  
• The profitability improvement program targeting cost efficiencies across procurement, fleet, and equipment use, with a net improvement goal of €8 million by offsetting headwinds, is projected to enhance net margins and earnings over the next two years.
  
• The ERP system upgrade across multiple divisions is anticipated to improve operational efficiencies significantly, potentially lowering operating expenses and boosting net margins and profitability as state-of-the-art systems become fully operational by mid-2026.
  
• The potential for smaller bolt-on acquisitions to expand market share and operational capabilities in target segments supports a strategic goal for annual growth of 5%, which could drive revenue and earnings growth through both organic and acquisitive expansion.

Lassila & Tikanoja Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lassila & Tikanoja Oyj's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.2% today to 4.5% in 3 years time.
• Analysts expect earnings to reach €35.8 million (and earnings per share of €0.95) by about March 2028, up from €-1.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from -202.2x today. This future PE is lower than the current PE for the GB Commercial Services industry at 14.6x.
• 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 7.23%, as per the Simply Wall St company report.

Lassila & Tikanoja Oyj Future Earnings Per Share Growth

Risks

• The demerger process introduces uncertainty and potential short-term disruption, which could impact the company’s revenue growth and net margins during the transition period.
  
• The new municipal tendering requirements for waste collection could reduce available market share and impact future revenue and profit margins in the circular economy segment.
  
• Continuing challenges in Facility Services Sweden, including recent contract losses and slower-than-expected turnaround, could negatively affect overall earnings and compound existing financial difficulties in this segment.
  
• Wage inflation and labor negotiations pose a risk to operating margins, particularly if wage increases exceed what the company has planned for, affecting profitability.
  
• The ERP system overhaul, though intended to enhance efficiency long-term, involves significant up-front costs and increased depreciation, which could strain earnings and operating margins in the short to medium term.

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 €803.0 million, earnings will come to €35.8 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of €9.0, the analyst price target of €9.0 is 0.0% different. 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.