Expansion Into The UK And Spark Initiative Will Reshape Future Operations

Key Takeaways

• SmartCraft's UK expansion and Spark initiative in the electrician sector promise substantial revenue growth through a larger market and higher ARPU.
  
• Acquisitions and strategic focus on customer success aim to boost recurring revenue, enhance earnings, and stabilize margins despite market challenges.
  
• Economic challenges, low industry margins, and high churn may affect SmartCraft's growth, while acquisitions dilute margins and Spark initiative increases expenses without short-term revenue gains.

Catalysts

Provides software solutions to the construction industry in Norway, Sweden, and Finland.

• SmartCraft's entry into the UK market and its expansion potential could drive significant revenue growth as the company taps into a larger total addressable market.
  
• The strategic initiative SmartCraft Spark, targeting the electrician sector, is expected to be a disruptive force, potentially leading to higher recurring revenue and increased average revenue per user (ARPU) as the solution matures.
  
• The company is actively acquiring companies and integrating them for improved recurring revenue, which could enhance long-term earnings as operational efficiencies and recurring revenue grow.
  
• Positive market signals in Sweden and Finland, such as interest rate cuts and construction project rebounds, may contribute to revenue growth and counterbalance tougher conditions in other regions.
  
• Despite current challenges with churn, particularly from bankruptcies, SmartCraft's strategic focus on solidifying customer success and expanding innovative solutions may improve net margins and stabilize future earnings.
  

SmartCraft Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SmartCraft's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.6% today to 27.1% in 3 years time.
• Analysts expect earnings to reach NOK 203.0 million (and earnings per share of NOK 1.28) by about March 2028, up from NOK 105.4 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 32.5x on those 2028 earnings, down from 41.3x today. This future PE is lower than the current PE for the NO Software industry at 37.5x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

SmartCraft Future Earnings Per Share Growth

Risks

• The construction industry, where SmartCraft operates, faces low margins, high levels of conflict, and regulatory demands for documentation, which could negatively impact revenue and earnings.
  
• Increased churn rates, particularly due to customer bankruptcies, and higher levels of downgrades as customers deal with fewer projects could adversely affect organic growth and recurring revenue.
  
• Recent acquisitions have resulted in margin dilution, impacting EBITDA in the short term, due to the acquired companies having lower margins and ongoing transition costs.
  
• The SmartCraft Spark initiative, although promising, will not contribute significantly to revenue in the short term while increasing operating expenses due to development investments and soft launch efforts.
  
• Economic conditions in crucial markets like Norway and the U.K., including high interest rates, have challenged market recovery efforts, potentially impacting SmartCraft’s growth and leading to uncertainties in sales and margins.

Valuation

• The analysts have a consensus price target of NOK33.0 for SmartCraft 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 NOK750.0 million, earnings will come to NOK203.0 million, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of NOK26.1, the analyst price target of NOK33.0 is 20.9% 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.