Emerging Technologies And Defense Industries To Benefit From R&D Investments

Key Takeaways

• Strategic focus on automation and electrification aligns with global trends, potentially boosting revenue and margins.
  
• Cost-saving measures and divestments aim to optimize operations, improving net margins and focusing on core growth areas.
  
• Challenges in the manufacturing facility, divestment execution, regional exposure, and competition may affect cash flow, revenue, and margins amid economic uncertainties.

Catalysts

Develops and delivers smart vision, smart manufacturing, and smart connectivity systems in the Netherlands, Europe, Asia, North America, and internationally.

• TKH Group's continued investment in R&D, with more than €80 million allocated, is expected to maintain its technology leadership and drive future revenue growth with new technologies for emerging industries, including defense.
  
• The record high order book and strong order intake, particularly in the offshore wind industry, are set to enhance future revenue through significant projects like the €200 million Inch Cape project.
  
• Strategic focus on automation and electrification, in response to labor scarcity and demand for efficiency, is likely to boost revenue and net margins by aligning with global market trends and customer needs.
  
• Completion of a €15 million cost-saving program and divestment of non-core activities can improve net margins and earnings by optimizing operations and focusing on core growth areas of automation and electrification.
  
• The progressive deployment of serial manufacturing in Eemshaven, along with a ramp-up in production capacities, is expected to overcome previous operational challenges, thus driving revenue and enhancing profitability in the Smart Connectivity segment.

TKH Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TKH Group's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 7.8% in 3 years time.
• Analysts expect earnings to reach €153.4 million (and earnings per share of €3.85) by about March 2028, up from €99.6 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 14.6x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the GB Electrical industry at 16.2x.
• 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 7.33%, as per the Simply Wall St company report.

TKH Group Future Earnings Per Share Growth

Risks

• The ongoing challenges in optimizing the Eemshaven manufacturing facility could cause delays or increased costs, affecting revenue and net margins, especially in the short term.
  
• The divestment of digitalization activities, though strategic, may impact revenue and net profit margins if not executed effectively or quickly.
  
• The substantial percentage of revenue still tied to Europe (approximately 60%), particularly given economic uncertainties, may expose the company to regional market risks that could affect earnings.
  
• High levels of competition and overcapacity in the optical fibre segment may continue affecting profitability and put pressure on earnings.
  
• Close to €170 million of raw material inventory signals potential working capital issues that could constrain cash flow and profitability if market conditions tighten.

Valuation

• The analysts have a consensus price target of €46.583 for TKH Group 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 €54.0, and the most bearish reporting a price target of just €41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €153.4 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of €39.72, the analyst price target of €46.58 is 14.7% 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.