Digital Adoption In Spain And Italy Will Unlock Future Opportunities

Key Takeaways

• Talenom's shift to digital services and unit separation may boost revenue and profit through increased efficiency and demand in diverse markets.
  
• Expansion plans and recurring revenue models in Spain and Sweden could stabilize and grow earnings, reducing volatility and enhancing profitability.
  
• High customer churn in Sweden and execution risks in international markets pose challenges to Talenom Oyj's revenue growth and earnings stability.

Catalysts

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

• The drive toward digitalization, particularly mandatory e-Invoicing in Spain and anticipated digital adoption in Italy, is expected to accelerate Talenom's growth. This shift is likely to positively impact their revenue as they position themselves to take advantage of the increased demand for digital financial solutions.
  
• The strategic separation of Talenom’s software and accounting services into distinct business units allows for increased focus and efficiency in scaling these operations. This separation, particularly the increased sales of software to competitors, is expected to enhance revenue and profit margins due to a more streamlined approach to business development.
  
• The high-profitability software business has significant growth potential, with the recent initiation of sales to other accounting offices in Finland and plans for expansion into larger markets such as Spain and Sweden. If successful, this could lead to substantial revenue growth as software sales increase both within Finland and internationally.
  
• The transition from nonrecurring to recurring revenue in Spain suggests a stronger, more stable revenue stream in the future, which should positively impact earnings consistency and reduce volatility, therefore potentially improving net margins over time.
  
• Improvements in Sweden's customer churn and the implementation of ONE Talenom operations, alongside systematic efforts to expand in Spain, indicate a potential for increased organic growth and profitability. As these markets stabilize and grow, it should lead to higher revenue and improved earnings, particularly in the latter half of the year and beyond.

Talenom Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Talenom Oyj's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 10.9% in 3 years time.
• Analysts expect earnings to reach €18.0 million (and earnings per share of €0.39) by about May 2028, up from €6.6 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 13.7x on those 2028 earnings, down from 24.7x today. This future PE is lower than the current PE for the FI Professional Services industry at 25.8x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Talenom Oyj Future Earnings Per Share Growth

Risks

• The decline in Sweden's revenue by 14% due to high customer churn in 2024 poses a risk to future revenue growth and overall profitability. Improving this will be crucial to achieving stable earnings.
  
• The software business's reliance on a one-time uplift of €1.5 million to achieve favorable results indicates potential volatility in revenues. Without repeated one-time boosts, future financial performance may be less predictable, affecting net margins.
  
• The strategic push into non-Finnish markets, particularly Spain and Sweden, carries execution risk due to varying adoption rates of e-Invoicing and competition. Slow growth or adverse regulatory changes could impact revenue targets and net earnings.
  
• The shift towards separating software and service invoice charges could introduce churn among existing clients who may not transition smoothly to the new billing model. Such churn risks impacting recurring revenues in the near term.
  
• The withdrawal from the Italian service market underscores potential difficulties in penetrating certain international markets, which could hinder geographic revenue diversification and growth potential, potentially affecting long-term earnings stability.

Valuation

• The analysts have a consensus price target of €4.5 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 €165.0 million, earnings will come to €18.0 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €3.56, the analyst price target of €4.5 is 20.9% 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.