Introduction Of Affordable EV Models Will Accelerate EV Charging Demand

Key Takeaways

• Organizational rightsizing and strategic validation could enhance operational efficiency, improving margins and aligning costs with revenue growth.
  
• Increased production capacity and international market expansion in EV charging and Smart Grids suggest potential for substantial future revenue growth.
  
• Margin pressures and operational inefficiencies, alongside financial instability and slow EV market growth, pose significant challenges to Alfen's profitability and future revenue growth.

Catalysts

Through its subsidiaries, engages in the design, engineering, development, production, and service of smart grids, energy storage systems, and electric vehicle charging equipment.

• The strategic initiative of organizational rightsizing and strategy validation could enhance future operational efficiency, likely bolstering net margins and profitability by aligning cost structure with revenue growth prospects.
  
• Alfen's planned increase in production capacity, particularly the anticipated rise to producing 100 substations per week by Q4, suggests potential future revenue growth, especially if demand aligns with increased capacity.
  
• Positive longer-term market forecasts for EV charging with a projected CAGR of 15% to 20% from 2023 to 2030 indicate potential substantial revenue growth, as market uptake accelerates with the introduction of more affordable EV models.
  
• Secured public tender wins and expansions in international markets for EV charging might drive revenue growth, supporting the company's future top-line expansion, especially in geographies with growing EV penetration.
  
• Continued technological innovation in Smart Grids, such as the development of a solid state transformer substation, could lead to future revenue streams and margin improvement, as it promises advanced grid management solutions appealing to grid operators.

Alfen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alfen's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.8% in 3 years time.
• Analysts expect earnings to reach €24.5 million (and earnings per share of €1.17) by about February 2028, up from €9.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €41.2 million in earnings, and the most bearish expecting €17 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 33.3x today. This future PE is lower than the current PE for the NL Electrical industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

Alfen Future Earnings Per Share Growth

Risks

• The decline in Alfen's adjusted gross margin from 30.5% to 28.9%, and the decrease in adjusted EBITDA from 9.4% to 5.5% year-on-year indicate margin pressure, which could continue to impact profitability if not addressed effectively, influencing net margins.
  
• Persistent inefficiencies and additional costs due to a moisture issue in Smart Grid Solutions have affected gross margins, and the ongoing related repairs could result in further cost overruns, impacting overall earnings.
  
• Recent provisions for moisture issues and obsolescence in EV charging, totaling over €16 million, imply potential risks of recurring or additional costs, which would adversely affect net profit.
  
• Anticipated breach of bank covenants and ongoing negotiations suggest financial instability and may incur higher financing costs or restructuring charges, negatively impacting future revenues and cash flows.
  
• The slow growth in the European EV market, with only a 2% increase in EV registrations, combined with lower visibility in the EV charging segment, poses a risk that anticipated revenue growth may not materialize as expected.

Valuation

• The analysts have a consensus price target of €17.55 for Alfen 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 €25.5, and the most bearish reporting a price target of just €12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €643.4 million, earnings will come to €24.5 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €14.14, the analyst price target of €17.55 is 19.4% 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.