European Partnerships And R&D Will Drive Future Tiltrotator Success

Key Takeaways

• A potential recovery in excavator sales and improved market conditions could drive revenue growth and stabilize the construction industry.
  
• Sustained growth in Europe, innovative R&D investments, and sustainability focus may enhance product offerings, supporting revenue expansion and stronger margins.
  
• Reliance on European markets and economic uncertainty in the Americas could hinder revenue growth due to regional fluctuations and slow global excavator sales recovery.

Catalysts

Engages in the design, production, and sale of excavator tools in Sweden, Denmark, Norway, Finland, rest of Europe, North and South America, Japan, South Korea, Australia, New Zealand, and internationally.

• The potential recovery in excavator sales, bolstered by dealers' existing stock, could lead to improved revenue growth once market conditions stabilize and confidence returns to the construction industry.
  
• The strong growth in Europe, particularly driven by new partnerships and increased awareness of the tiltrotator concept, suggests sustained revenue expansion as Europe becomes a more significant contributor to net sales.
  
• Ongoing R&D investments in third-generation tiltrotators and collaborations with OEMs to ease installation processes position engcon to enhance product offerings, potentially boosting both revenue and net margins through innovative, higher-margin products.
  
• Efforts to strengthen the organization and improve knowledge in weaker markets, like the Americas, may lead to revenue growth as market conditions improve post the U.S. election, and the penetration of tiltrotators increases.
  
• The company's focus on sustainability, recognized by awards and integrated within product offerings, may serve as a future growth catalyst by aligning with increasing regulatory demands and customer preferences, potentially supporting stronger net margins.

engcon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming engcon's revenue will grow by 27.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 19.3% in 3 years time.
• Analysts expect earnings to reach SEK 625.0 million (and earnings per share of SEK 4.1) by about February 2028, up from SEK 173.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.6x on those 2028 earnings, down from 93.8x today. This future PE is greater than the current PE for the SE Machinery industry at 26.2x.
• 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 5.38%, as per the Simply Wall St company report.

engcon Future Earnings Per Share Growth

Risks

• High interest rates and cautious purchasing behavior in the construction industry, especially in the Nordics and Americas, could negatively impact future revenue and order intake.
  
• Weak excavator sales globally, along with high existing dealer stock levels, suggest a potentially slow recovery in sales and could limit revenue growth if not resolved quickly.
  
• Sales in the Americas declined 29% in order intake due to economic uncertainty and upcoming elections, posing significant risks to revenue growth in this region.
  
• The strengthening of the Swedish krona has started having a negative effect on financials, potentially impacting net margins if currency trends continue.
  
• The significant reliance on European markets for growth, while other regions lag, could expose the company to regional economic fluctuations and impact overall earnings stability if European demand weakens.

Valuation

• The analysts have a consensus price target of SEK108.333 for engcon 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 SEK3.2 billion, earnings will come to SEK625.0 million, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK107.0, the analyst price target of SEK108.33 is 1.2% 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.