Climate Transition Plan And F1 Partnership Will Drive Future Success In Sustainable Lighting

Key Takeaways

• New organizational structure and cost reduction measures are expected to positively impact revenue and net margins.
  
• Focus on sustainable solutions and LED growth aims to drive future revenue and innovation.
  
• Economic challenges in key markets and declining Conventional lighting hinder revenue and margin stability, with labor and competition pressures adding further risks.

Catalysts

Provides lighting products, systems, and services in Europe, the Americas, and internationally.

• The implementation of a new organizational structure with four verticalized businesses allows Signify to capture growth opportunities faster and with more customer-centricity, potentially boosting future revenues.
  
• The €200 million cost reduction program, which delivered €131 million of savings in 2024, is expected to further reduce costs in 2025, positively impacting net margins.
  
• The Climate Transition Plan, aimed at reducing greenhouse gas emissions by 90% and achieving net zero by 2040, aligns with growing demand for sustainable solutions, likely driving future revenue growth in specialty and connected lighting.
  
• The strategic partnership with Mercedes-AMG PETRONAS Formula 1 Team is expected to enhance brand visibility and innovation, potentially boosting sales and revenues.
  
• As the conventional lighting segment declines, Signify's focus on growing LED and connected lighting sales, which represented 93% of total sales in 2024, could drive a favorable revenue and earnings mix shift in the future.

Signify Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Signify's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 5.7% in 3 years time.
• Analysts expect earnings to reach €370.2 million (and earnings per share of €2.94) by about February 2028, up from €328.0 million 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 12.1x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the GB Electrical industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Signify Future Earnings Per Share Growth

Risks

• Headwinds in key markets such as China and the Professional business in Europe led to a decrease in comparable sales growth, which directly impacts Signify's revenue potential.
  
• The decline in Conventional lighting is significant, with predictions of a further 20% to 30% decline in 2025, representing a risk to both revenue and earnings stability due to the drag effect on growth and adjusted EBITA margins.
  
• The competitive landscape pressure, especially in the Professional sector, results in negative price and mix effects, limiting potential margin improvements and profitability.
  
• Cost reduction programs face challenges from rising labor inflation and higher transportation costs, which could offset savings and impact net margins negatively if markets don't recover.
  
• Market uncertainties in China, including overcapacity and aggressive local competitors, create a volatile environment that could hinder revenue and growth prospects despite longer-term opportunities.

Valuation

• The analysts have a consensus price target of €28.371 for Signify 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 €42.0, and the most bearish reporting a price target of just €18.32.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.5 billion, earnings will come to €370.2 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €21.16, the analyst price target of €28.37 is 25.4% 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.