Hydrogen Membranes And Life Sciences May Outweigh Mobility Weakness Over Time

Catalysts

About GVS

GVS develops and manufactures advanced filtration and separation solutions for healthcare, life sciences, safety, and mobility applications.

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

• Although the ramp up of new MedTech and Safety products aligns with a gradual recovery in procedure volumes and customer project launches, delays in MDR related approvals in Europe and any slippage in client rollouts could mute the expected uplift in top line growth and limit operating leverage on EBITDA.
• Although full control of transfusion medicine production in Mexico and future internal membrane manufacturing should raise integration synergies, any setback in regulatory approvals or slower than expected customer onboarding in the U.S. blood market could keep division margins below the group average and weigh on overall earnings.
• Although the new plants in China and the U.K. position GVS to benefit from regionalization of supply chains and growing demand for higher quality local products, aggressive local competition and pricing pressure may compress gross margins and delay the contribution of these assets to net income.
• Although new hydrogen membrane and EV related applications give GVS exposure to the shift toward cleaner energy and electrified mobility, customer validation timelines and the ongoing weakness in the broader Mobility segment risk keeping revenue growth modest and limit any improvement in divisional profitability.
• Although expanding Life Science distribution agreements and regional hubs can shorten delivery times and support higher recurring revenues, execution risks in building these networks and managing working capital efficiently could constrain free cash flow conversion and slow improvement in leverage and net profit margins.

Assumptions

This narrative explores a more pessimistic perspective on GVS 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 GVS's revenue will grow by 4.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.4% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach €71.2 million (and earnings per share of €0.31) by about December 2028, up from €22.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €82.5 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 19.0x on those 2028 earnings, down from 31.1x today. This future PE is lower than the current PE for the IT Medical Equipment industry at 19.1x.
• The bearish analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent structural weakness in the Energy and Mobility division, which is still recording around an 11% sales decline and depends on a troubled end market, could offset growth in Healthcare and Life Science. This could cap group revenue expansion and constrain operating leverage on EBITDA and earnings growth over the medium term.
• Foreign exchange headwinds from depreciating U.S. and Chinese currencies, which already reduced sales by EUR 6.9 million and negatively affected EBITDA, may continue given GVS' growing exposure to international markets. This could create a long term drag on reported revenue, net margins and earnings.
• Execution and integration risks around recent acquisitions, the ramp up of the transfusion medicine business moved from Haemonetics and the new plants in China, the U.K. and Mexico could lead to prolonged periods of lower than group average profitability. This could limit the expected improvement in EBITDA margin and slow net income growth.
• Working capital volatility, highlighted by a EUR 20 million negative swing in the first nine months and heavy reliance on fourth quarter normalization, suggests ongoing risk that inventory management, receivables collection and seasonality could weaken free cash flow generation. This could keep leverage and net profit progression below expectations.
• Dependence on product launches, regulatory clearances and customer validation in MedTech, Safety, Life Science and new hydrogen membrane applications, together with continuing uncertainty in the U.S. dialysis contract and the timing of new transfusion medicine contracts, could slow the anticipated revenue acceleration and delay margin expansion. This could reduce earnings growth versus the optimistic outlook described by management.

Valuation

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

• The assumed bearish price target for GVS is €5.3, which represents up to two standard deviations below the consensus price target of €5.97. This valuation is based on what can be assumed as the expectations of GVS'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 €7.5, and the most bearish reporting a price target of just €5.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €482.6 million, earnings will come to €71.2 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of €3.8, the analyst price target of €5.3 is 28.3% 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.