Levypinta And Ovesta Acquisitions Poised To Improve Future Performance

Key Takeaways

• Strategic acquisitions and focus on profitable product lines are expected to enhance revenue, EBITA margins, and net margins, supporting long-term growth.
  
• Operational resilience and strong cash flow generation provide financial flexibility for acquisitions, focusing on efficient capital deployment and margin improvements.
  
• Reliance on acquisitions over organic growth and challenges in key markets pose risks to long-term revenue and profitability amid uncertain market conditions.

Catalysts

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

• Bergman & Beving's strategic acquisitions, such as Levypinta and Ovesta, contribute to revenue growth and enhance EBITA margins due to their high profitability levels. These acquisitions are expected to support future revenue and earnings growth.
  
• Continuous improvements in profitable working capital, with a target to reach 45% by fiscal year '26-'27, suggest enhancements in operational efficiency, which could improve net margins and overall profitability.
  
• Despite a sluggish market, Bergman & Beving has managed a 20-quarter streak of increasing profits, demonstrating operational resilience that could continue to drive earnings growth as market conditions improve.
  
• The company's focus on phasing out low-margin products and improving gross margin stability, along with price adjustments, is expected to support net margins in the future.
  
• The expansion of credit facilities and strong cash flow generation provide financial flexibility to continue their acquisition strategy, which supports long-term revenue and earnings growth.

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 April 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 39.3x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 31.5x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Bergman & Beving Future Earnings Per Share Growth

Risks

• The company's reliance on acquisitions for revenue growth, rather than organic growth, poses a risk to sustained long-term revenue expansion if acquisition opportunities become scarce or fail to integrate successfully.
  
• The company faces challenges in the Nordic construction and industrial markets, which are sluggish and show a decline in key sectors, potentially impacting future revenue and EBITA growth.
  
• Despite achieving profitability, there is a reliance on market conditions improving, which introduces risk if the anticipated recovery, particularly in the construction sector, does not materialize as expected, impacting net margins.
  
• Extraordinary items affecting the gross margin, such as stock buybacks and discontinued operations, present risks to maintaining or improving current gross profit levels.
  
• The company has not seen significant organic inventory reductions to pre-COVID levels, potentially affecting working capital efficiency and cash flow if future sales growth does not justify current inventory levels.

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 SEK298.5, the analyst price target of SEK332.7 is 10.3% 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.