Defense And Aquaculture Tailwinds Will Drive Long Term Earnings Power

Catalysts

About Nekkar

Nekkar builds and scales ocean focused industrial and technology companies serving maritime, defense, aquaculture and offshore markets.

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

• Expansion of global defense and naval fleets is driving a NOK 7 billion tender pipeline at Syncrolift, and conversion of this pipeline into newbuild and upgrade contracts should lift group revenues and operating leverage as higher volume flows through existing overhead.
• Stricter environmental regulation in aquaculture, including incentives for closed containment in sensitive zones, positions FiiZK as a preferred supplier and supports a step change in Protectus system volumes, driving recurring service income and structurally higher group margins.
• Digitalization and automation of offshore drilling operations, supported by Intellilift and the InteliWell joint venture with SaaS based contracts, can compound high margin recurring software revenues and improve earnings stability relative to project based income.
• Rising connectivity and IT complexity in global shipping is supporting Globetech’s repeat business model, where growing contracted vessel fleets and bolt on acquisitions like Firstpoint increase recurring revenue visibility and support incremental margin expansion.
• Improved cost control and focus on repeat product deliveries at Techano, combined with a broadening offshore energy and infrastructure project pipeline, should gradually convert current loss making operations into positive EBITDA and enhance consolidated earnings power from the existing NOK 740 million order backlog.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nekkar's revenue will grow by 38.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.6% today to 21.6% in 3 years time.
• Analysts expect earnings to reach NOK 318.3 million (and earnings per share of NOK 3.62) by about December 2028, up from NOK -14.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NOK379.6 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 11.4x on those 2028 earnings, up from -83.8x today. This future PE is lower than the current PE for the NO Machinery industry at 24.8x.
• 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 7.57%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent delays in awarding large defense and maritime infrastructure tenders for Syncrolift, which management already highlights as being outside their control, could keep utilization of the NOK 7 billion tender pipeline low for several years and structurally cap revenue growth and operating leverage from this core segment, weighing on group earnings.
• FiiZK remains loss making despite strong top line growth and is investing heavily in marketing projects and new Protectus designs, so if regulatory support for closed containment systems or adoption by major fish farmers normalizes after an initial boost, the business could be left with high fixed costs and weak pricing power, depressing net margins and group profitability.
• Techano Oceanlift is still generating negative EBITDA and relies on a handful of projects with a stated focus on repeat deliveries, meaning any downturn in offshore and infrastructure demand or execution issues on these projects could prolong losses and constrain the improvement in consolidated EBITDA and net profit.
• The group’s growing exposure to software and automation through Intellilift and the InteliWell joint venture is positive in theory, but if rig automation rollout slows due to cyclicality in offshore drilling or competitive offerings, the expected scaling of high margin recurring SaaS revenues may not materialize, limiting upside to revenue quality and overall earnings.
• Although Nekkar has a strong balance sheet today with significant cash, treasury shares and an untapped credit facility, continued negative operating cash flow driven by working capital swings, share buybacks and inorganic expansion could erode this buffer over time, reducing financial flexibility for growth investments and potentially pressuring future earnings and equity returns.

Valuation

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

• The analysts have a consensus price target of NOK17.0 for Nekkar based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NOK1.5 billion, earnings will come to NOK318.3 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of NOK12.35, the analyst price target of NOK17.0 is 27.4% 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.