Acquisitions Like Batterilagret And The ReCare Launch Will Drive Future Revenue

Key Takeaways

• Acquisitions and new brand launches target revenue growth through expanded offerings and sustainability to capture diverse markets.
  
• Enhanced logistics and efficiency improvements intend to reduce costs and support profitability recovery through focused initiatives.
  
• Dependence on acquisitions and declining EBITA, combined with weak organic growth and customer mix issues, threaten Alligo's financial stability and revenue prospects.

Catalysts

Offers workwear, personal protection equipment, tools, and consumables in Sweden, Norway, and Finland.

• Acquisitions like Batterilagret are expected to enhance future revenue by expanding product offerings, particularly in the battery segment, and tapping into new customer bases, both B2B and B2C.
  
• Stabilization and efficiency improvements in the new central warehouse in Norway, Vestby, suggest enhanced logistics and distribution capabilities, potentially improving net margins by reducing operational costs and enhancing service delivery.
  
• The launch of the ReCare brand, focusing on a more circular offer, could drive future revenue growth by catering to the increasing demand for sustainable and environmentally friendly products and services.
  
• Initiatives like Tools Turnaround (TTA) in Finland aim to reverse negative trends in profitability, which could positively impact earnings if successful, by increasing the efficiency and profitability of underperforming businesses.
  
• The continued focus on own brands and cost-reduction programs, combined with positive market signals and a recovering SMEs segment, is expected to enhance contribution margins and potentially increase future earnings.

Alligo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alligo's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 7.0% in 3 years time.
• Analysts expect earnings to reach SEK 778.0 million (and earnings per share of SEK 15.56) by about March 2028, up from SEK 274.0 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 12.9x on those 2028 earnings, down from 26.1x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 34.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

Alligo Future Earnings Per Share Growth

Risks

• The company experienced a significant decline in EBITA from SEK 308 million to SEK 214 million, which indicates a decrease in profitability due to weaker demand, reduced supplier bonuses, and adverse mix effects impacting contribution margins. This could negatively affect future earnings.
  
• Organic growth was negative at minus 3%, with a slight recovery in Finland and continued weakness in Sweden, indicating that the company's revenue generation efforts are still challenged in key markets.
  
• The increasing leverage from 1.6x to 2.4x due to acquisitions, combined with a lower EBITA, raises concerns about the company's financial stability and its ability to manage debt, potentially impacting net margins.
  
• The company's reliance on acquisitions to drive growth indicates a possibly unsustainable growth strategy if organic growth remains weak, which could impact revenue stability if future acquisitions do not perform as expected.
  
• The adverse changes in customer mix, particularly the drop in small and medium enterprises (SMEs) purchases, and decreased sales to public administration and green-tech industries could further pressurize revenue streams if these trends persist.

Valuation

• The analysts have a consensus price target of SEK163.5 for Alligo 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 SEK11.1 billion, earnings will come to SEK778.0 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of SEK142.8, the analyst price target of SEK163.5 is 12.7% 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.