Expansion Plans Will Strengthen Market Presence In Nordic Countries

Key Takeaways

• Strategic expansion and product enhancements are driving member retention and revenue growth across markets, improving customer satisfaction and net margins.
  
• Share buyback and dividend initiation signal financial strength, potentially enhancing earnings per share and supporting stock valuation.
  
• Intense competition and necessary investments across markets could strain financial resources and impact net margins, affecting Sats' growth and earnings.

Catalysts

Provides fitness and training services in Norway, Sweden, Denmark, and Finland.

• SATS is implementing new products and additional group exercise classes that enhance member engagement, leading to longer member retention and increased average membership pricing, ultimately boosting revenue growth.
  
• The successful replication of Norway's upgraded group training capacity across other markets, such as Sweden and Finland, is expected to drive revenue and improve net margins as customer satisfaction and retention continue to rise.
  
• SATS is strategically expanding its club network with 8 to 12 new clubs per year, focusing on high-quality locations that promise high profitability and contribute to long-term earnings growth.
  
• The initiation of a share buyback and dividend program indicates strong cash flow and reduced leverage, which could enhance earnings per share and support stock valuation.
  
• Positive trends in member activity and engagement in existing clubs across all markets increase the lifetime value of memberships, which is anticipated to bolster both revenue and profit margins.

Sats Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sats's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 11.5% in 3 years time.
• Analysts expect earnings to reach NOK 701.0 million (and earnings per share of NOK 3.49) by about May 2028, up from NOK 326.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK866 million in earnings, and the most bearish expecting NOK597 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 23.2x today. This future PE is lower than the current PE for the NO Hospitality industry at 22.5x.
• 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 9.63%, as per the Simply Wall St company report.

Sats Future Earnings Per Share Growth

Risks

• There is a risk that the company's expansion plans in Norway may not yield the expected returns if they reach a ceiling on member growth without significant investment in new clubs, which could impact future revenue and net margins.
  
• The competition in markets like Sweden is intense, and the company's plan to open more clubs while trying to catch up with competitors could dilute profit margins and strain financial resources, affecting earnings.
  
• Despite strong financial indicators in Norway, the company's lower market share and weaker profitability in Finland and Denmark may necessitate more investment with uncertain returns, potentially impacting overall net margins.
  
• The ongoing need for maintenance and strategic upgrades, guided at 5% of revenue, poses a risk to capital allocation and could limit cash available for other growth opportunities, affecting future earnings.
  
• The extended lifetime of fitness equipment might reduce depreciation costs in the short term but could lead to increased future expenditures if equipment requires earlier replacement than forecasted, potentially impacting net income.

Valuation

• The analysts have a consensus price target of NOK40.75 for Sats 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 NOK45.0, and the most bearish reporting a price target of just NOK34.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK6.1 billion, earnings will come to NOK701.0 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 9.6%.
• Given the current share price of NOK37.5, the analyst price target of NOK40.75 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.