Acquisition Of Riikku Group Will Access New Markets And Leverage Glazing Technology

Key Takeaways

• Successful integration of air-to-air heat pumps and acquisition of Riikku Group may enhance revenue and long-term market access.
  
• Improved sustainability KPIs and operational efficiency efforts could bolster competitive position and enhance future earnings.
  
• Competitive pressures in Sweden and Denmark, cautious balcony markets, and slow construction recovery are impacting Balco's margins and revenue growth.

Catalysts

Engages in developing, manufacturing, selling, and installing balcony systems for tenant-owner associations, private landlords, municipal housing, architects, builders, and shipping companies.

• Balco Group's order intake increased by 22% in the most recent quarter and by 41% for the full year, suggesting future revenue growth as these orders are fulfilled.
  
• The company's integration of air-to-air heat pumps in Norwegian projects has been successful, potentially leading to increased revenue and improved net margins due to differentiation and increased project value.
  
• The strategic acquisition of Riikku Group offers potential long-term value by providing access to new markets and leveraging their glazing technology, which could enhance future earnings once the Nordic markets recover.
  
• Balco Group's improved sustainability KPIs and a better risk rating from Sustainalytics could enhance its competitive position and lead to cost savings, potentially improving net margins.
  
• Ongoing efforts to improve operational efficiency and profitability, such as the integration and better utilization of production capacity, could result in improved earnings in future periods.

Balco Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Balco Group's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 10.8% in 3 years time.
• Analysts expect earnings to reach SEK 207.6 million (and earnings per share of SEK 9.27) by about March 2028, up from SEK 1.1 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 8.0x on those 2028 earnings, down from 729.7x today. This future PE is lower than the current PE for the SE Building industry at 22.7x.
• 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 7.61%, as per the Simply Wall St company report.

Balco Group Future Earnings Per Share Growth

Risks

• The competitive pressures in the Swedish and Danish markets are creating a difficult environment for Balco's facade companies, potentially impacting revenue and net margins.
  
• The cautious market in Denmark regarding new balcony installations on older buildings has resulted in longer decision times, which may delay revenue realization.
  
• Lower gross margins in 2024 due to a different cost structure from acquired companies Riikku and Suomen, as well as overcapacity in production, are negatively affecting net earnings.
  
• The lack of a V-shaped recovery in the Nordic new construction market could dampen future revenue growth, despite a gradual market improvement.
  
• Economic pressures, including slow market recovery and a conservative acquisition strategy due to profitability concerns, might limit revenue growth and negatively affect future earnings potential.

Valuation

• The analysts have a consensus price target of SEK58.0 for Balco 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 SEK1.9 billion, earnings will come to SEK207.6 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of SEK33.6, the analyst price target of SEK58.0 is 42.1% 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.