Demand For IT Infrastructure Will Rise With Defense And AI Investments

Key Takeaways

• Atea is positioned for revenue growth due to strong demand in IT infrastructure, particularly in defense and AI sectors, and anticipated hardware upgrades.
  
• Enhanced earnings and margin improvements are expected from a shift to higher-margin products, robust cash flow, and increased public sector sales.
  
• Declining margins, intense competition, restructuring costs, and economic challenges threaten Atea's profitability and financial stability.

Catalysts

Provides IT infrastructure and related solutions for businesses and public sector organizations in the Nordic countries and Baltic regions.

• Atea is poised for future revenue growth due to increasing demand for IT infrastructure, driven by growth areas such as defense, AI, and the upcoming Windows 10 end-of-life, which will necessitate hardware upgrades.
  
• The company anticipates improvements in net margins as its revenue mix shifts towards higher-margin products and as intense price competition stabilizes, with expectations of margin normalization in the first half of 2025.
  
• Atea is likely to experience enhanced earnings growth from its robust cash flow, driven by strong public sector sales, improved cash collection processes, and strategic management of vendor payment terms.
  
• The potential for higher sales in the defense sector across the seven countries Atea operates in represents a forward-looking catalyst that could significantly boost revenue and profitability in 2025.
  
• As hardware replacements and investments in new areas such as AI and cybersecurity accelerate, Atea's top-line revenue and associated high-margin service sales are expected to grow, supporting overall earnings expansion.

Atea Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atea's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 3.3% in 3 years time.
• Analysts expect earnings to reach NOK 1.4 billion (and earnings per share of NOK 12.73) by about March 2028, up from NOK 775.0 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 13.8x on those 2028 earnings, down from 19.0x today. This future PE is lower than the current PE for the GB IT industry at 19.1x.
• Analysts expect the number of shares outstanding to grow by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Atea Future Earnings Per Share Growth

Risks

• Atea's declining gross margins due to a shift in customer mix, with more sales growth coming from new frame agreements and large public sector projects, could impact future profitability as these agreements tend to carry lower margins. This could affect net margins.
  
• Intense price competition in the IT infrastructure market over the past year has pressured Atea's gross margins, suggesting that continued fierce competition could further impact Atea's profitability. This could affect net margins.
  
• The impact of restructuring costs, such as those seen in Sweden where they incurred a onetime cost of NOK 39 million, highlights potential financial setbacks that could affect overall earnings negatively.
  
• Economic challenges in key markets, such as Finland’s recession which resulted in declining sales and EBIT, could continue to negatively impact Atea's revenue and earnings if economic conditions do not improve.
  
• The variability in growth and sales trends, exemplified by the substantial negative growth in Q3 2023, reflects an unstable market environment which could affect the predictability and stability of Atea's financial performance, influencing both revenue and earnings.

Valuation

• The analysts have a consensus price target of NOK141.0 for Atea 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 NOK43.0 billion, earnings will come to NOK1.4 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of NOK131.8, the analyst price target of NOK141.0 is 6.5% 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.