Recovering IT Infrastructure Market And New Customer Agreements Will Expand Future Opportunities

Key Takeaways

• Future revenue growth is expected from new customer agreements and IT market recovery, focusing on PC and networking sales to strengthen margins.
  
• Operational efficiencies and better cash flow processes may enhance margins and improve earnings and dividend capacity.
  
• Intense competition and dependence on hardware sales and public sector orders threaten Atea's margins, revenue stability, and growth opportunities.

Catalysts

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

• New customer agreements and a recovering market in IT infrastructure suggest future revenue growth, underpinned by higher demand in 2025. Revenue is likely to benefit from these expanding market opportunities.
  
• Atea's strategic focus on segmenting and increasing PC and networking sales, driven by Windows end-of-life and AI infrastructure, is expected to strengthen margins over time as these are higher value products.
  
• Continued growth in managed services should support higher overall gross margins, as services have higher margins than hardware resales.
  
• Significant reductions in net working capital and improved cash flow processes, like faster invoicing and reduced receivables, point toward a healthier cash position, which may positively impact future earnings and dividend capacity.
  
• Atea's stable headcount amidst fluctuating service and product growth suggests the potential for improved operational efficiencies, which could enhance net margins as revenue growth stabilizes.

Atea Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atea's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 3.3% in 3 years time.
• Analysts expect earnings to reach NOK 1.4 billion (and earnings per share of NOK 12.33) by about February 2028, up from NOK 771.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 19.9x today. This future PE is lower than the current PE for the GB IT industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Atea Future Earnings Per Share Growth

Risks

• Intense price competition and a shift in the customer mix towards large public sector projects have resulted in a decline in Atea's gross margins, which could negatively impact future net margins and profits.
  
• The company's profit growth in key regions like Sweden, Denmark, and Finland has decreased due to severe margin declines and ongoing economic challenges, creating potential risks to Atea's revenue and earnings stability.
  
• Atea's revenue is highly dependent on hardware sales, which are subject to cyclical fluctuations and investment trends, leading to unpredictable revenue patterns and potential earnings volatility.
  
• The high level of vendor payment terms and reliance on public sector orders for cash flow might create challenges in maintaining consistent cash flows, impacting Atea's financial stability and operational flexibility.
  
• The slow uptake in AI-integration and investments, as evidenced by lower than expected sales of AI-related products, could limit Atea's growth opportunities and slow revenue increases from this emerging sector.

Valuation

• The analysts have a consensus price target of NOK152.667 for Atea 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 NOK175.0, and the most bearish reporting a price target of just NOK133.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK42.5 billion, earnings will come to NOK1.4 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of NOK137.0, the analyst price target of NOK152.67 is 10.3% 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.