Earnings Will Decline As Profit Margins Shrink Despite European Central Bank Rate Cuts

Key Takeaways

• Anticipated macroeconomic improvements and strategic transformations may boost revenue growth and improve net margins for Nexity.
  
• Asset disposals and urban development opportunities could stabilize earnings and support long-term growth.
  
• Favorable economic and policy conditions, alongside internal efficiency efforts, could enhance Nexity's revenues, profit margins, and earnings stability by supporting demand and reducing costs.

Catalysts

Operates as a real estate company in Europe and internationally.

• The anticipated continuation of macroeconomic improvements, such as rate reductions by the European Central Bank, is expected to enhance client purchasing power and support revenue growth for Nexity.
  
• The company's transformation plan, which includes initiatives like resizing and recalibrating, is projected to cut operating expenses by 16% by 2026, potentially improving net margins in the medium term.
  
• The disposal of non-core assets and the sale of stakes in companies like Bien’ici and property management businesses are expected to reinforce Nexity's financial position and free up capital, likely enhancing earnings stability.
  
• Stabilization of construction costs, indicated by the BT01 indicator being below inflation, may bolster margins and profitability by reducing cost pressures on new projects.
  
• The potential for increased development in urban regeneration and the promising pipeline from the Carrefour deal suggest opportunities for steady flows of new revenue from 2025 onward, contributing to enhanced earnings growth.

Nexity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexity's revenue will decrease by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.5% today to 0.6% in 3 years time.
• Analysts expect earnings to reach €20.5 million (and earnings per share of €0.93) by about February 2028, down from €55.7 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 53.8x on those 2028 earnings, up from 13.4x today. This future PE is greater than the current PE for the GB Real Estate industry at 14.0x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.82%, as per the Simply Wall St company report.

Nexity Future Earnings Per Share Growth

Risks

• The decrease in European Central Bank rates has increased purchasing power for Nexity's clients, potentially driving revenues and supporting earnings.
  
• Stabilizing construction costs being lower than inflation improve profit margins, as reduced input costs can enhance Nexity's net margins and earnings.
  
• The political movement towards addressing the social housing crisis could lead to increased demand for Nexity's services, boosting revenues.
  
• Nexity's transformation plan, which includes initiatives to reduce costs and increase efficiency, may result in improved profit margins and higher net margins by the end of 2025.
  
• The strong performance in retail sales during the third quarter and the expected continued momentum could enhance revenues and earnings stability.

Valuation

• The analysts have a consensus price target of €14.36 for Nexity 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 €3.2 billion, earnings will come to €20.5 million, and it would be trading on a PE ratio of 53.8x, assuming you use a discount rate of 11.8%.
  
• Given the current share price of €13.49, the analyst price target of €14.36 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.