Digitalization Will Unlock Opportunities With SMEs In Southern Europe

Key Takeaways

• Legislative digitalization and e-invoicing mandates present growth opportunities for Talenom, potentially increasing revenue from SME digital platform adoption.
  
• Separating the software business enhances scalability and creates new revenue streams, positively impacting net sales and market presence.
  
• Economic slowdown and challenges in Sweden and Finland, software transitions, and acquisition reliance hinder Talenom's revenue and profitability growth prospects.

Catalysts

Provides accounting, and account and software services for small and medium-sized enterprises in Finland, Sweden, Spain, and Italy.

• The transformation towards digitalization, driven by legislative changes such as mandatory e-invoicing in Southern Europe and shifting customer behavior, offers a significant growth opportunity for Talenom as small and medium-sized enterprises will need to adopt digital platforms, thereby potentially increasing revenue.
  
• Separation of the software business into its own company allows Talenom to offer its software to other accounting firms, enhancing scalability and providing a new revenue stream, which could positively impact net sales and expand market presence.
  
• Cost savings from an estimated €3 million annual reduction in the organizational cost base, along with a lower cost base due to decreased investments after heavy prior investment, can improve net margins.
  
• Focus on core competencies and partnerships for non-accounting services could lead to increased efficiency and profitability, potentially boosting earnings as Talenom leverages its strengths and creates stronger partner ecosystems.
  
• Expansion into new markets with a robust software architecture and advanced digital tools could significantly drive growth, especially in countries like Sweden and Spain, ultimately contributing to revenue growth and enhanced profitability.

Talenom Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Talenom Oyj's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 10.3% in 3 years time.
• Analysts expect earnings to reach €16.7 million (and earnings per share of €0.36) by about January 2028, up from €6.8 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 16.5x on those 2028 earnings, down from 25.9x today. This future PE is lower than the current PE for the FI Professional Services industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.51%, as per the Simply Wall St company report.

Talenom Oyj Future Earnings Per Share Growth

Risks

• There is a notable economic slowdown in key markets like Sweden and Finland, which has led to reduced revenue growth and challenging market conditions, affecting Talenom's revenue outlook.
  
• The transition to new software systems in Sweden has resulted in a significant temporary decrease in profitability, while also causing customer churn, thus impacting net margins and overall earnings.
  
• Talenom's growth strategy heavily relies on acquisitions, and a reduction in acquisition activity has contributed to slower revenue growth, potentially harming their long-term earnings potential.
  
• The separation of software and non-accounting services could lead to increased operational complexity and necessitate additional investments in sales channels, risking an increase in costs which could impact net margins.
  
• Talenom's dependence on improving software rollouts and digital transformation under challenging market conditions, and competitive pressures may affect their ability to sustain profitability and revenue growth.

Valuation

• The analysts have a consensus price target of €4.95 for Talenom 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 €161.2 million, earnings will come to €16.7 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €3.85, the analyst's price target of €4.95 is 22.2% 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.