Renewable Power And Data Center Demand Will Drive Long-Term Margin Expansion

Catalysts

About Eltel

Eltel designs, builds and maintains critical power and communication infrastructure across the Nordics and selected European markets.

What are the underlying business or industry changes driving this perspective?

• Accelerating investments in power grids and renewable energy, including solar PV and high voltage substations, position Eltel to win higher margin turnkey projects that can drive sustained revenue growth and support expansion toward its 5 percent adjusted EBITA margin target.
• Rapid build out of Nordic and European data centers, particularly from hyperscalers and international operators, aligns directly with Eltel’s combined power and communications capabilities and should increase order intake, improve project mix and lift gross margins.
• Structural shift away from labor intensive, low margin legacy telecom work toward more material intensive, design led projects in new business areas reduces overhead intensity and supports faster growth in earnings than in gross profit.
• Systematic operational and commercial excellence programs, including resource utilization, fleet optimization and tighter invoicing terms, are compounding across countries and can translate current nine quarter profitability improvements into higher, more stable net margins.
• Broader and more diversified customer base, supported by frame agreements with major utilities and infrastructure players, improves visibility on long term workloads and is likely to reduce earnings volatility while supporting gradual top line growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Eltel's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.0% today to 1.8% in 3 years time.
• Analysts expect earnings to reach €15.7 million (and earnings per share of €0.1) by about December 2028, up from €100.0 thousand today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 1288.1x today. This future PE is lower than the current PE for the GB Construction industry at 17.8x.
• 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 10.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategic shift away from labor intensive legacy telecommunications toward new and adjacent markets such as solar power and data centers may prove more cyclical and project based than expected. Any slowdown in hyperscaler or renewable investments could therefore reduce the volume of high margin turnkey work and weigh on revenue and gross margin growth.
• Norway and parts of Denmark and Germany are still in the early stages of turnaround and contract ramp up. If new customer wins fail to fully offset double digit declines in traditional communication volumes, these geographies could revert to losses and drag on group adjusted EBITA and net margin.
• The stronger focus on large, capital intensive projects, combined with existing working capital consumption and leverage of 3.5 times, increases balance sheet risk. Delays in project phasing, customer payments or advance payments could pressure cash flow, raise net debt further and constrain future earnings growth.
• Profitability gains rely heavily on ongoing operational and commercial excellence, including tight resource utilization and fleet optimization. Any execution slippage, wage inflation or inability to replicate Finland’s best practices across all markets could stall margin expansion and keep adjusted EBITA below the 5 percent target.
• Eltel’s growing dependence on a concentrated set of large power and data center customers, supported by frame agreements and multi year contracts, exposes it to contract repricing, competitive bidding pressure and project specific issues. Any of these factors could compress pricing power and reduce future revenue and earnings visibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SEK9.9 for Eltel based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €868.2 million, earnings will come to €15.7 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of SEK9.0, the analyst price target of SEK9.9 is 9.1% 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.