Leveraging Spain's e-Invoicing Directive And SaaS Focus Will Drive Future Expansion

Key Takeaways

• Systematic implementation of software processes in Sweden enhances efficiencies, improving operating margins and profitability.
  
• Strategic international expansion in Spain and focus on e-Invoicing and software-as-a-service capabilities will drive revenue and margin growth.
  
• Integration challenges, high customer churn, and increased competition pose risks to Talenom's profitability and revenue growth, impacting strategic shifts and earnings potential.

Catalysts

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

• The company is focusing on improving profitability in Sweden by systematically implementing software processes and the One Talenom operation model, which is expected to enhance operating efficiencies and improve EBITDA margins.
  
• Leveraging the mandatory implementation of the e-Invoicing directive in Spain is seen as a major growth opportunity, and Talenom has positioned itself to benefit from this structural change, likely leading to significant revenue growth in the software segment.
  
• The separation of software and service business operations aims to allow focused development in each domain, with the software business anticipated to grow its annual net sales by over 20%, contributing to future revenue and earnings growth.
  
• The strategic focus on international expansion in Spain, coupled with acquisitions, is anticipated to accelerate revenue growth and enhance profitability as integration and local synergies are realized.
  
• The new focus on building sales channels and developing software-as-a-service capabilities in the software business positions Talenom to capture more market share and improve overall net margins by offering scalable digital solutions.

Talenom Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Talenom Oyj's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 10.6% in 3 years time.
• Analysts expect earnings to reach €17.1 million (and earnings per share of €0.37) by about March 2028, up from €6.1 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 14.5x on those 2028 earnings, down from 25.6x today. This future PE is lower than the current PE for the FI Professional Services industry at 26.2x.
• 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 7.06%, as per the Simply Wall St company report.

Talenom Oyj Future Earnings Per Share Growth

Risks

• The economic slowdown in Finland and Sweden has significantly impacted revenue growth, with net sales in these regions declining by 1.2% and 5% respectively for the full year. This downturn poses a risk to sustained revenue and earnings growth.
  
• Integration challenges and high customer churn rates, particularly in Sweden, could continue to negatively affect overall profitability and operational efficiency, reducing net margins.
  
• Increasing competition in mature markets such as Sweden means Talenom may face difficulties in acquiring new clients and sustaining growth, potentially impacting revenue streams.
  
• The company's financials include significant past investments in software development and acquisitions, but these have not all yielded returns as expected, potentially impacting future earnings if the trend continues.
  
• A shift in strategy towards becoming more of a software house rather than an accounting firm requires substantial organizational and cultural change, posing execution risks that could affect earnings if not effectively managed.

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 €162.0 million, earnings will come to €17.1 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of €3.42, the analyst price target of €4.5 is 23.9% 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.