Future European Electronics Demand And GNSS Transition Will Support A Fairly Priced Outlook

Catalysts

About Norbit

Norbit develops and manufactures technology solutions for oceans, connectivity and contract manufacturing customers, with production mainly based in Europe.

What are the underlying business or industry changes driving this perspective?

• The roll out of 4G based GNSS on board units for trucks, combined with the ongoing phase out of 2G GSM networks across European tolling markets, points to a replacement need for existing fleets that can support volumes on the new contract and influence longer term Connectivity revenues and capacity utilization.
• The focus on autonomy in marine operations, including growing use of surface and subsurface autonomous vessels and strong customer interest in products such as the iWBMS X sonar platform, supports continued demand for high end sonar systems and can be relevant for revenue resilience and product mix in Oceans.
• Increased geopolitical uncertainty and customer preferences for designed and produced in Europe electronics are feeding demand from defense and security clients, which is already visible in PIR order intake and may affect the durability of revenue streams and operating margins in that segment.
• The move to offer vertically integrated European manufacturing capacity to external technology companies, supported by new high speed SMT lines and factory expansions, can keep attracting contract manufacturing partners and improve operating leverage, which is closely linked to EBIT margins and earnings variability.
• Rising R&D investment levels and the use of AI in image processing, target recognition and internal processes are intended to support product development such as modular sonar software upgrades, which can influence future product differentiation, pricing power and ultimately earnings quality.

Assumptions

This narrative explores a more pessimistic perspective on Norbit compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Norbit's revenue will grow by 19.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.7% today to 17.0% in 3 years time.
• The bearish analysts expect earnings to reach NOK 660.2 million (and earnings per share of NOK 10.34) by about January 2029, up from NOK 378.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NOK768.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.4x on those 2029 earnings, down from 30.7x today. This future PE is lower than the current PE for the NO Electronic industry at 48.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued contract wins and strong demand from defense and security clients in the PIR segment, supported by capacity expansions and new SMT lines in European factories, could support higher and more durable revenue and EBIT than implied by a flat share price view, affecting revenue growth and earnings.
• The ramp up of 4G GNSS on board units for trucks, tied to the long term phase out of 2G GSM networks across Europe and a large installed truck base, could support a multi year replacement cycle for Connectivity that lifts Connectivity revenues and improves overall margins.
• Growing adoption of high end sonar systems, including the iWBMS X platform and use in autonomous surface and subsurface vessels, together with wider Americas demand, could support Oceans volumes and pricing, which may underpin higher long term revenue and EBIT margins.
• Use of AI in image processing, target recognition and internal processes, along with rising R&D spend and modular software upsell on existing hardware like iWBMS X, may support product differentiation and higher value mix, which could support net margins and earnings quality.
• Expansion of vertically integrated European manufacturing capacity, supported by new SMT lines and factory floor space, together with a focus on scaling selected external tech clients, could support operating leverage in PIR and Connectivity, potentially lifting EBIT margins above what a flat share price scenario might imply.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Norbit is NOK175.0, which represents up to two standard deviations below the consensus price target of NOK207.5. This valuation is based on what can be assumed as the expectations of Norbit's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK240.0, and the most bearish reporting a price target of just NOK175.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be NOK3.9 billion, earnings will come to NOK660.2 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of NOK182.0, the analyst price target of NOK175.0 is 4.0% lower. 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.