Rising Defense Budgets And Medical Competition Will Challenge Long-Term Profitability

Catalysts

About Bittium Oyj

Bittium Oyj develops secure communications solutions and medical technology devices for defense, industrial and healthcare customers.

What are the underlying business or industry changes driving this perspective?

• Reliance on rising European defense budgets and modernization programs concentrates growth in a single cyclical area. Any slowdown or cancellation of tenders in countries like Spain, the U.K. or Austria could stall the current high product order book and cap revenue expansion.
• The shift toward software defined tactical radios and hybrid 5G military networks demands sustained high R&D and production scalability investments. These may outpace realized international volumes and compress net margins despite reported efficiency gains.
• Scaling global defense deliveries, including potential technology transfer arrangements with partners such as Indra, risks diluting Bittium’s value capture per unit as more economics move to local manufacturing. This may limit operating leverage and earnings growth.
• Growth in remote ECG and home sleep apnea diagnostics is attracting larger, better capitalized competitors. If Bittium fails to significantly broaden its customer base beyond Boston Scientific, Medical segment sales could lag while fixed development and commercialization costs weigh on profitability.
• Engineering Services faces a structurally challenging R&D outsourcing market with budget constraints even as Bittium pivots its capabilities toward defense and 5G non terrestrial networks. Slower than expected project ramp ups could leave utilization suboptimal and restrict improvement in group level operating margins.

Assumptions

This narrative explores a more pessimistic perspective on Bittium Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Bittium Oyj's revenue will grow by 25.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.2% today to 17.5% in 3 years time.
• The bearish analysts expect earnings to reach €31.3 million (and earnings per share of €0.89) by about December 2028, up from €6.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €35.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 113.7x today. This future PE is lower than the current PE for the GB Software industry at 25.2x.
• The bearish analysts expect the number of shares outstanding to grow by 0.08% per year for 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.

Risks

What could happen that would invalidate this narrative?

• Defense and Security markets are supported by long term increases in European defense budgets and ongoing modernization of tactical communications, and Bittium has already demonstrated strong momentum with Defense and Security net sales growing by more than 19 percent year on year and a significantly larger order book. This could underpin sustained revenue growth and higher earnings over several years.
• The company is positioned on structural growth themes such as software defined radios, hybrid tactical and 5G networks and 5G non terrestrial networks, with pilot deliveries in multiple countries and negotiations with large partners like Indra and BAE. Successful conversion of these opportunities into multi year programs could drive scale, operating leverage and improving net margins.
• In Medical, secular growth in remote ECG and home sleep apnea diagnostics and the new multi year ECG device agreement with Boston Scientific, including joint development for the U.S. market, create recurring and expanding demand. These factors may offset earlier restructuring headwinds and support rising segment revenues and earnings.
• Engineering Services has returned to growth despite a challenging market, with order intake roughly doubling and new wins in both defense and manufacturing customers. If this trend continues it can stabilize utilization, support cross selling with Defense and Security and contribute positively to group operating profit.
• Bittium’s strong balance sheet, with an equity ratio above 70 percent, net debt close to zero and improving operating cash flow, provides financial flexibility to keep investing in R&D and production scalability without excessive dilution or financial strain. This can support long term margin expansion and more resilient earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Bittium Oyj is €14.5, which represents up to two standard deviations below the consensus price target of €19.73. This valuation is based on what can be assumed as the expectations of Bittium Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €23.5, and the most bearish reporting a price target of just €14.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €179.0 million, earnings will come to €31.3 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €20.7, the analyst price target of €14.5 is 42.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.