Divestitures Cost Cuts And Cloud Migrations Will Streamline Operations

Key Takeaways

• Advanced negotiations to divest certain divisions aim to streamline operations and focus on more profitable segments, potentially improving margins.
  
• Initiatives for cost reduction, efficiency, and recurring revenue growth lay a stable foundation for improved profitability and cash flow in 2025.
  
• Geographic concentration in Norway and reliance on share issuances highlight potential revenue volatility, shareholder dilution, and constrained financial flexibility.

Catalysts

A software and consulting company, provides digital business solutions in Norway, Europe, the Americas, and internationally.

• The company is in advanced negotiations to divest Arribatec Marine and Arribatec Hospitality, which could streamline operations and focus on more profitable segments, potentially improving net margins.
  
• Initiatives to reduce costs and improve efficiency have been implemented, including a significant reduction in headcount and downsizing corporate head office, expected to positively impact net margins and cash flow in 2025.
  
• The substantial increase in recurring revenue, now accounting for 43% of total revenue and up 17% year over year, provides a stable revenue stream that could improve revenue predictability and margins.
  
• Successful contract wins, including significant contracts in the EA & BPM and business services segments, lay the foundation for revenue growth and higher earnings in 2025.
  
• The company's focus on cloud migrations and digital transformation projects is expected to drive growth in managed IT services revenue, positively impacting earnings in 2025.

Arribatec Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arribatec Group's revenue will grow by 13.4% annually over the next 3 years.
• Analysts are not forecasting that Arribatec Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Arribatec Group's profit margin will increase from -14.4% to the average NO IT industry of 5.7% in 3 years.
• If Arribatec Group's profit margin were to converge on the industry average, you could expect earnings to reach NOK 47.8 million (and earnings per share of NOK 0.1) by about April 2028, up from NOK -82.7 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 77.4x on those 2028 earnings, up from -2.1x today. This future PE is greater than the current PE for the NO IT industry at 20.7x.
• 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 8.61%, as per the Simply Wall St company report.

Arribatec Group Future Earnings Per Share Growth

Risks

• The company experienced an EBITDA loss, partly due to one-time noncash items. Although there is a positive adjusted EBITDA, the overall loss could indicate challenges in managing operating expenses and achieving profitability, impacting net margins.
  
• A significant portion of revenue still relies heavily on Norway, with a decline in Continental Europe, which suggests geographic concentration risk and potential revenue volatility if local market conditions change.
  
• The issuance of a large number of new shares and warrants could lead to substantial dilution of existing shareholders, potentially affecting the share price and earnings per share.
  
• The write-down of NOK 22 million in goodwill for Hospitality indicates potential overvaluation or underperformance of acquired assets, which could affect future earnings and necessitate further write-downs.
  
• Despite raising funds, the company’s cash position seems restricted, given that a portion of the available cash is restricted. This might limit flexibility in managing operating costs or investing in growth, impacting future growth prospects and financial stability.

Valuation

• The analysts have a consensus price target of NOK6.0 for Arribatec Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK838.6 million, earnings will come to NOK47.8 million, and it would be trading on a PE ratio of 77.4x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of NOK0.37, the analyst price target of NOK6.0 is 93.9% 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.