Acquisition Strategy And Efficiency Measures Will Strengthen Nordic Presence

Key Takeaways

• Strategic acquisitions and market expansion are poised to enhance revenue, geographical reach, and overall earnings for Bergman & Beving.
  
• Cost-cutting measures and inventory improvements aim to boost net margins and efficiency, supporting profitability in a challenging market.
  
• The reliance on acquisitions for revenue growth amidst sluggish Nordic markets poses risks, with concerns about low organic growth and potential challenges in future acquisitions.

Catalysts

Provides solutions for the manufacturing and construction sectors in Sweden, Norway, Finland, and internationally.

• Bergman & Beving's acquisition strategy, exemplified by acquisitions like Levypinta and Ovesta, is expected to drive future growth through increased EBITA and expanded geographical reach, likely boosting revenue and overall earnings.
  
• The company aims to continue improving its profit over working capital ratio towards a target of 45% by fiscal year '26-'27, which could enhance net margins and profitability.
  
• Structural efficiencies and cost reductions, such as the phasing out of lower-margin products and discontinuation of unprofitable operations, are intended to improve net margins despite a challenging market environment.
  
• The focus on improving inventory turnover and reducing stock levels is anticipated to enhance cash flow and working capital efficiency, which could indirectly benefit net margins and profitability.
  
• Expansion into less saturated markets like Finland and potential entry into new regions for existing products are expected to contribute to revenue growth and market share expansion.

Bergman & Beving Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bergman & Beving's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.9% in 3 years time.
• Analysts expect earnings to reach SEK 337.6 million (and earnings per share of SEK 12.55) by about February 2028, up from SEK 203.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK285 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, down from 42.9x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 34.5x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

Bergman & Beving Future Earnings Per Share Growth

Risks

• The company is facing a sluggish market, especially in the Nordic construction and industrial sectors, which could impact revenue and profit growth if the market does not improve as expected.
  
• There are concerns about low organic growth, as the company's recent revenue increase is primarily driven by acquisitions rather than organic growth, which could indicate challenges in maintaining sustainable revenue growth.
  
• The gross margin has slightly decreased due to extraordinary items and product phase-outs, which may impact net margins if not addressed effectively in the near future.
  
• The dependency on Nordic industrial and construction resellers, which make up a significant portion of revenue, exposes the company to risks from these sectors' slow market conditions, potentially affecting overall earnings.
  
• While acquisitions have driven profit growth, there may be risks related to integration and achieving expected synergies, and the slowing M&A market might limit future acquisition opportunities if conditions change.

Valuation

• The analysts have a consensus price target of SEK332.7 for Bergman & Beving 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 SEK5.7 billion, earnings will come to SEK337.6 million, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK325.5, the analyst price target of SEK332.7 is 2.2% 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.