Acquisitions Of IK Partners And Monroe Capital Will Diversify Asset Management Business

Key Takeaways

• Strategic acquisitions and portfolio adjustments are enhancing Wendel's growth and cash flow, supporting increased dividend payouts and improving the company's financial health.
  
• Continued transformation and strategic initiatives, such as those by Bureau Veritas and Stahl, are expected to boost margins, contribute to earnings growth, and enhance value creation.
  
• Reliance on Bureau Veritas and high leverage heighten financial risks amidst market uncertainties, with sector slowdowns threatening revenue, margins, and asset valuations.

Catalysts

A private equity firm specializing in equity financing in middle markets and later stages through leveraged buy-out and transactions and acquisitions.

• Strong growth of Bureau Veritas, driven by its LEAP28 strategic plan, is expected to continue, with projections of mid
• to high single-digit organic revenue growth and improved margins in 2025. This affects future revenue and net margins.
  
• The asset management business, with the integration of IK Partners and upcoming acquisition of Monroe Capital, is anticipated to significantly contribute to future earnings through fee-related earnings growth and larger asset under management. This impacts earnings and cash flow.
  
• Continued portfolio rotation and strategic acquisitions, such as Globeducate and investments in private credit through Monroe Capital, are set to enhance Wendel's growth profile and cash flow generation, thereby supporting increased dividend payouts. This affects cash flow and dividends.
  
• The transformation of businesses like Stahl, which has repositioned as a pure-play specialty coatings formulator with expected higher margins, will likely result in better EBITDA margins and contribute positively to the financial results. This impacts net margins.
  
• Share buybacks, already contributing to value through accretion, remain a tool for enhancing earnings per share, although the focus is on long-term value creation through asset performance and strategic investments. This impacts earnings per share (EPS).

Wendel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wendel's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 3.6% in 3 years time.
• Analysts expect earnings to reach €324.2 million (and earnings per share of €5.22) by about March 2028, up from €-265.1 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 21.8x on those 2028 earnings, up from -15.5x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 23.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.65%, as per the Simply Wall St company report.

Wendel Future Earnings Per Share Growth

Risks

• The potential slowdown in certain sectors, particularly automotive and aerospace for Scalian, could negatively impact its revenue and EBITDA margins.
  
• The negative performance of unlisted assets like Stahl, ACAMS, and Scalian in 2024, due to challenging market conditions and volatile multiples, may affect overall net margins.
  
• The company's unlisted asset value saw a decrease, with a like-for-like drop of 7%, suggesting potential risk to asset valuations which could impact future profits.
  
• Wendel’s high leverage, with a loan-to-value ratio at 23% post-Monroe acquisition, could pose financial risks impacting net income amidst market uncertainties.
  
• Significant reliance on Bureau Veritas for positive contributions may lead to risk concentration, adversely affecting revenue diversification and net earnings if sector conditions fluctuate.

Valuation

• The analysts have a consensus price target of €124.0 for Wendel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €135.0, and the most bearish reporting a price target of just €108.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.0 billion, earnings will come to €324.2 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of €96.6, the analyst price target of €124.0 is 22.1% 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.