Revenue Decline Expected Due To Intensifying Competition In Nordic Electricity Market

Key Takeaways

• Intensified competition and phased-out low-margin customers could pressure Elmera Group's revenue and EBIT across Consumer and Business segments.
  
• Rising costs from internal capacity building and Swedish bankruptcies may compress net margins amidst uncertain demand for spot products in the Nordic segment.
  
• Elmera Group's strategic asset sales, cost management, and market positioning indicate potential for strong future revenue growth and earnings enhancement.

Catalysts

Engages in the purchase, sale, and portfolio management of electrical power to households, private and public companies, and municipalities in Norway.

• The proposed improvement in the subsidizing scheme by the Labor Party could potentially increase electricity consumption in Norway, positively impacting net revenue for Elmera Group.
  
• Increased competition, particularly around the Black Week to Christmas period, previously impacted customer acquisition. This could lead to continued pressure on revenue growth in the Consumer segment if competition intensifies.
  
• The phaseout of certain low-margin customers and the reduction in volume from the mild weather impacted the Business segment. If similar trends occur, it could result in decreased revenue and EBIT.
  
• Continued internal sales capacity building and loss provisions due to a rising bankruptcy trend in Sweden could increase operating expenses, potentially compressing net margins.
  
• The anticipated seasonal rebound in demand for spot products in the Nordic segment might not materialize fully if customers continue to favor fixed price contracts, potentially limiting revenue growth in that segment.

Elmera Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elmera Group's revenue will decrease by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach NOK 357.0 million (and earnings per share of NOK 3.22) by about March 2028, up from NOK 353.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK422 million in earnings, and the most bearish expecting NOK292 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 11.3x today. This future PE is lower than the current PE for the NO Electric Utilities industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Elmera Group Future Earnings Per Share Growth

Risks

• The Elmera Group has demonstrated a strong track record of financial performance with increased net revenue and EBIT adjusted, despite challenges such as mild weather and reduced consumption volumes. This indicates the company's ability to maintain profitability and could positively impact future earnings.
  
• The strategic sale of assets, such as the 40% ownership in Metzum, showcases Elmera Group's ability to realize value through spin-offs, which enhances financial robustness and could positively impact net margins.
  
• Despite increased competition, Elmera Group has successfully managed to improve core margins and maintain a stable cost structure, even in challenging market conditions. This efficiency could contribute to stable or improving net margins.
  
• The group is strategically positioned to leverage anticipated seasonal demand shifts and has increased in-house sales capacity, which could drive future revenue growth and maintain or increase earnings.
  
• The Elmera Group operates in a stable, potentially growing electricity market, with strong brand positioning and a robust IT platform that supports growth across the Nordics, suggesting potential for revenue growth and strong earnings in the future.

Valuation

• The analysts have a consensus price target of NOK31.667 for Elmera Group 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 NOK37.0, and the most bearish reporting a price target of just NOK24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK11.3 billion, earnings will come to NOK357.0 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 5.9%.
• Given the current share price of NOK36.5, the analyst price target of NOK31.67 is 15.3% lower.
• 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.