Long-Term AI And Edge Adoption Will Support A Stronger Outlook For This Business

Catalysts

About Seco

Seco provides hardware and software solutions to help industrial customers use artificial intelligence and edge computing in their equipment.

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

• Rising use of artificial intelligence and automation in industrial, medical and energy equipment aligns directly with Seco’s edge AI and Clea software offering. This can support future revenue growth from both hardware and recurring software fees.
• Growing demand for connected devices is supporting an increase in software recurring revenue. This can lift gross margin and provide a larger contribution to EBITDA and net income over time.
• Greater need for hardware agnostic, interoperable platforms in fragmented OEM tech stacks plays to Seco’s Clea framework and Application Hub. This can support higher software attachment rates and a richer revenue mix.
• Capacity expansion in Arezzo and China, combined with ongoing production efficiencies and better component purchasing, is set up to affect unit costs and support gross margin and EBITDA margin if volumes scale into the available €350 million capacity.
• Partnerships such as Raspberry Pi Modular Vision and deployments with customers like Galbusera and Hitachi Energy expand Seco’s presence in established verticals. This can feed the order backlog and support revenue and earnings visibility.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Seco's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.7% today to 16.0% in 3 years time.
• Analysts expect earnings to reach €45.2 million (and earnings per share of €0.3) by about January 2029, up from €-9.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €57.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 26.8x on those 2029 earnings, up from -42.7x today. This future PE is greater than the current PE for the IT Tech industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.26%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Seco is leaning heavily on long term adoption of AI and edge solutions in industrial and vending equipment, but management itself highlights that B2B AI adoption remains slow. If OEMs keep delaying projects, hardware shipments and recurring software revenue growth could both fall short, affecting revenue and EBITDA.
• The business mix currently benefits from higher margin verticals like Medical and Defense and from favorable component purchasing terms. Any shift back toward lower margin industrial or vending customers, or less favorable component pricing, could compress the 55% gross margin and the 22% EBITDA margin.
• Germany is currently down 30% year on year and vending is still feeling destocking at a German customer. If weak industrial conditions in that market persist or spread to other regions, order intake and the 10% higher backlog could stop supporting the current growth trend, putting pressure on revenue and adjusted net income.
• The company is investing in new plants in Arezzo and China that lift capacity to about €350 million of revenue. If demand does not fill that added capacity in a reasonable time, underutilization and higher fixed costs could hurt EBITDA margins and cash generation despite the targeted manufacturing efficiencies.
• The Clea software suite and Application Hub are central to the long term recurring revenue story, yet management indicates that some large customers will only move into mass production later next year and that many design wins relate mainly to 2026 and 2027. Any delay in those deployments or weaker than expected conversion into recurring contracts could limit growth in software revenue and slow any improvement in net margins.

Valuation

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

• The analysts have a consensus price target of €3.71 for Seco 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 €4.6, and the most bearish reporting a price target of just €3.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €282.1 million, earnings will come to €45.2 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of €2.93, the analyst price target of €3.71 is 21.0% 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.