Expansion Into North America And Middle East Will Open New Revenue Streams

Key Takeaways

• Focus on decarbonization and environmental transition in key markets is expected to drive substantial revenue growth as demand for sustainable solutions increases.
  
• Geographic expansion and strategic partnerships, particularly in high-growth areas, are likely to drive earnings by opening new revenue streams.
  
• Revenue volatility and rising costs from taxes and finance could impact earnings, while completing defense programs and canceled projects threaten future revenue stability.

Catalysts

Provides environmental, technical, and strategic consultancy services in the United Kingdom, Europe, North America, China, rest of Asia, Australia, and internationally.

• The strategic focus on decarbonization and environmental transition in key markets such as transport, energy, and policy is expected to drive significant revenue growth as global demand for sustainable solutions rises.
  
• The centralization of functional teams and efforts to reduce fixed costs, particularly in the Automotive and Industrial (A&I) business, are anticipated to bolster net margins by creating a more flexible and efficient operating model.
  
• The launch of a new digital platform and digital electricity pricing model is poised to increase digital and strategic revenues, expected to more than double over the coming years, thereby enhancing overall profit margins.
  
• Strategic geographic expansion, particularly in North America, Australia, and the Middle East, alongside partnerships in high-growth areas such as the California High-Speed Rail project, is likely to drive earnings by opening new revenue streams.
  
• Continued focus on mergers and acquisitions, aimed at accelerating transformation in '24-'25, could enhance long-term revenue streams and potentially increase earnings through synergistic benefits and expanded market presence.

Ricardo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ricardo's revenue will decrease by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 3.1% in 3 years time.
• Analysts expect earnings to reach £13.8 million (and earnings per share of £0.22) by about February 2028, up from £700.0 thousand 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 23.8x on those 2028 earnings, down from 199.1x today. This future PE is lower than the current PE for the GB Professional Services industry at 27.7x.
• 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 8.47%, as per the Simply Wall St company report.

Ricardo Future Earnings Per Share Growth

Risks

• Order variability and delayed client orders, particularly in the Emerging A&I business, indicate potential revenue volatility, impacting short-term revenue and profit forecasts.
  
• Increased finance costs due to higher interest rates have raised the cost of borrowing, potentially affecting net margins and overall profitability.
  
• Anticipated tax increases in higher tax jurisdictions, such as Australia, suggest rising costs that might reduce future net earnings.
  
• The completion of certain high-volume programs in the Defense and Performance Products businesses implies potential future revenue declines as these programs come to an end.
  
• Project cancellations and deferrals, notably in the Water business due to canceled large contracts, create uncertainty in order intake, impacting future revenue stability and profit margins.

Valuation

• The analysts have a consensus price target of £4.166 for Ricardo 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 £6.0, and the most bearish reporting a price target of just £2.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £443.3 million, earnings will come to £13.8 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of £2.24, the analyst price target of £4.17 is 46.2% 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.