Rising Online Grocery And In Store Automation Will Drive Long Term Earnings Quality

Catalysts

About StrongPoint

StrongPoint delivers technology and automation solutions that improve efficiency and profitability for grocery retailers.

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

• Scaling of the transaction based order picking solution through the Vusion co selling partnership and wins such as Sonae MC and Carrefour Belgium should support higher recurring revenue and more resilient earnings quality.
• Rising online grocery penetration and demand for efficient last mile fulfilment, including Q commerce lockers, positions StrongPoint to capture a larger share of customer capex and service contracts, driving top line growth and service margins.
• Growing retailer focus on in store automation and theft reduction, illustrated by Vensafe pilots in multiple U.K. grocery chains, can translate into multi year rollouts that lift hardware revenues and high margin software and support income.
• Shift by retailers toward integrated in store ecosystems that bundle order picking, ESLs and lockers creates opportunities for larger, higher value contracts, supporting both revenue growth and operating leverage in the U.K. and other core markets.
• Continued cost discipline after recent restructuring measures, combined with mix shift toward software, installation and recurring service revenues, should gradually expand EBITDA margins and strengthen cash generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming StrongPoint's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 3.1% in 3 years time.
• Analysts expect earnings to reach NOK 56.4 million (and earnings per share of NOK 1.25) by about December 2028, up from NOK 3.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, down from 116.5x today. This future PE is lower than the current PE for the NO Electronic industry at 36.2x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The transition away from the legacy ESL partner Pricer creates uncertainty around how quickly new Vusion based ESL contracts can fully replace winding down license and support income. This could slow recurring revenue growth and delay the mix shift toward higher quality earnings and margins.
• Many of StrongPoint's key growth drivers such as Vensafe antitheft systems, CashGuard Connect and locker solutions are still in pilot or early commercial stages with long sales cycles and regulatory constraints in areas like tobacco. Delays or weak conversion of pilots to large rollouts would limit top line acceleration and operating leverage.
• Management acknowledges that the 2025 revenue and EBITDA margin ambitions now look challenging. This signals execution risk in scaling new SaaS and project revenues fast enough to offset soft legacy areas and may keep EBITDA margins and earnings below bullish expectations for longer.
• Despite cost reduction programs, the company still carries a sizable fixed cost base relative to a project driven revenue mix where around 70 percent is nonrecurring. This leaves profitability vulnerable if market demand, rollout timing or the U.K. growth momentum normalize, which could cap net margins and earnings growth.
• International initiatives in markets like Spain and CashGuard sales via overseas partners have seen years of weak returns and declining demand. Although strategically de emphasized, they still consume management focus and capital, which could dilute returns on investment and weigh on group level margins and earnings.

Valuation

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

• The analysts have a consensus price target of NOK13.0 for StrongPoint based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NOK1.8 billion, earnings will come to NOK56.4 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of NOK9.5, the analyst price target of NOK13.0 is 26.9% 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.