EUR 150 Million Share Buyback And Dividend Increase Will Improve Shareholder Returns

Key Takeaways

• New capital allocation policy with share buybacks and dividend increase signals stronger shareholder returns and potential EPS and valuation boost.
  
• Bolt-on M&A strategy and investments in high-growth areas support strategic market expansion and revenue growth opportunities.
  
• Competitive pressure, macroeconomic challenges, and execution risks in acquisitions could compress margins, while energy costs and currency instability affect operational costs and earnings.

Catalysts

Provides flat linen, workwear, and hygiene and well-being solutions in France, Central Europe, Scandinavia, Eastern Europe, the United Kingdom, Ireland, Latin America, Southern Europe, and internationally.

• The new capital allocation policy includes a €150 million share buyback program and a proposed dividend increase of 5%, signaling a commitment to improving shareholder returns, which could positively impact EPS and valuation.
  
• Elis continues to leverage improved operational efficiencies and pricing power, especially noticeable in Germany where EBITDA margins improved significantly by 450 basis points, indicating potential for further margin expansion and earnings growth.
  
• The company plans to continue its bolt-on M&A strategy, with an expected investment of €50 million to €150 million per year, which could support revenue growth through strategic market consolidations and geographical expansions.
  
• Elis is actively developing services for smaller clients within existing geographies, which could contribute to organic revenue growth by opening new market segments and improving customer density.
  
• Investments in high-growth areas such as the Cleanroom and Pest Control businesses, which posted double-digit revenue growth in 2024, are likely to drive future revenue and margin expansion.

Elis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elis's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 8.4% in 3 years time.
• Analysts expect earnings to reach €436.8 million (and earnings per share of €1.93) by about April 2028, up from €337.8 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 17.7x on those 2028 earnings, up from 15.4x today. This future PE is greater than the current PE for the GB Commercial Services industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Elis Future Earnings Per Share Growth

Risks

• An increasingly competitive environment in various regions, such as Denmark, might limit pricing power and could compress margins, affecting net margins.
  
• The adverse macroeconomic environment could negatively impact demand, notably within the Hospitality segment, which is cyclical and influenced by factors like events and tourism trends, thus affecting revenue.
  
• Political or economic instability in Latin American markets could affect currency strength and result in negative currency impacts on reported revenue and earnings.
  
• Execution risks exist in integrating acquisitions and maximizing synergies, as seen with recent deals in the Netherlands, which could impact net margins and earnings if not well managed.
  
• Energy price fluctuations and regulatory changes, especially in central and northern Europe, could lead to unforeseen increases in operational costs, impacting net margins.

Valuation

• The analysts have a consensus price target of €25.9 for Elis 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 €5.2 billion, earnings will come to €436.8 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of €22.06, the analyst price target of €25.9 is 14.8% 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.