Operational Efficiency Will Improve Through Expansion Into Electrification And Med-Tech

Key Takeaways

• Strategic acquisitions and expansion in growth sectors like electrification and med-tech are set to enhance AQ Group's revenue and operational scale.
  
• Investments in manufacturing upgrades and renewable energy aim to boost efficiency, cost-effectiveness, and margins.
  
• Underperformance in key markets and inefficiencies in recent acquisitions threaten revenue growth, while changing tax regimes add financial uncertainty.

Catalysts

Manufactures and sells components and systems for industrial customers in Sweden, rest of European countries, and internationally.

• AQ Group is pursuing growth through strategic acquisitions, having acquired multiple factories and companies like JIT Mech and mdexx in 2024, which is expected to enhance net sales and operational scale. This focus on inorganic growth should positively impact revenue and earnings.
  
• The company's expansion in high-growth sectors like electrification, defense, and med-tech multiple successful project wins in these areas could drive revenue growth, given the increasing global focus on sustainability and security.
  
• AQ Group's investments in manufacturing capabilities and renewable energy, including factory upgrades and new machinery, aim to improve efficiency and production capacity. These initiatives are expected to enhance net margins and cost-effectiveness.
  
• The newly acquired German businesses and underutilized factories are expected to benefit from AQ Group's operational improvements and cost-saving strategies, potentially increasing margins over time as these businesses become more efficient.
  
• The demand for innovative products and services, such as electrical bus charging systems and high-voltage direct current transfer technology, is expected to grow strongly, potentially driving future revenue increases and margin expansion due to higher value-added offerings.

AQ Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AQ Group's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.8% today to 7.6% in 3 years time.
• Analysts expect earnings to reach SEK 813.6 million (and earnings per share of SEK 8.91) by about March 2028, up from SEK 665.0 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 23.8x on those 2028 earnings, down from 24.0x today. This future PE is greater than the current PE for the SE Electrical industry at 18.8x.
• 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 6.29%, as per the Simply Wall St company report.

AQ Group Future Earnings Per Share Growth

Risks

• Decrease in demand from key market segments like trucks, construction equipment, buses, agriculture, and food, especially in Europe, which has led to negative organic growth of 9% and could further impact revenue negatively if not addressed.
  
• The recent acquisitions, such as mdexx and Michael Riedel, have underutilized factories and are not yet profitable, potentially leading to a diluted profit margin if cost structures and factory utilization are not improved, impacting net margins.
  
• The consolidated net sales decreased by 5% for the year, falling short of the target to increase by 15% annually, pointing to possible revenue challenges if sales growth targets continue to be unmet.
  
• Acquisitions of family-owned businesses, like JIT Mech, often reveal inefficiencies such as poor inventory management which may affect overall earnings if improvements are not realized quickly.
  
• Exposure to changing tax regimes, such as Pillar 2, could impact profit margins and after-tax earnings, especially as the company operates in low-tax countries, adding financial uncertainty going forward.

Valuation

• The analysts have a consensus price target of SEK177.0 for AQ Group 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 SEK10.7 billion, earnings will come to SEK813.6 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 6.3%.
• Given the current share price of SEK174.18, the analyst price target of SEK177.0 is 1.6% higher. 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.