Third-Generation Tiltrotators And Global Expansion Will Strengthen Market Position

Key Takeaways

• Strategic expansion in Asia and the Americas and product line innovation drive revenue growth and enhance market position.
  
• Cost efficiency initiatives, including management restructuring, aim to improve margins and operating profits.
  
• Heavy reliance on Europe and Nordics creates risks due to potential market downturns, while U.S. changes pose challenges to growth and profitability.

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.

• Engcon's expansion into the Americas and Asia, particularly through strategic investments like setting up a sales company in Japan, is expected to enhance future revenue growth due to increasing market penetration in these regions.
  
• The anticipated recovery and growth in the Nordic region, following a substantial drop in sales, are expected to boost revenue as confidence returns and excavator sales pick up.
  
• Expanding the product line with the third-generation tiltrotator models and the introduction at notable events like Bauma is projected to drive revenue growth and enhance market position by tapping into demand for newer, more efficient products.
  
• Continued improvement of the order intake across all regions, especially in Europe, which outpaced the shrinking excavator market, indicates potential revenue growth from increasing market share and product adoption.
  
• Cost efficiency initiatives, such as management restructuring in North America and the optimization of production costs, aim to improve net margins and operating profits.

engcon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming engcon's revenue will grow by 27.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 17.1% in 3 years time.
• Analysts expect earnings to reach SEK 588.9 million (and earnings per share of SEK 3.88) by about April 2028, up from SEK 216.0 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 33.3x on those 2028 earnings, down from 66.9x today. This future PE is greater than the current PE for the SE Machinery industry at 23.1x.
• 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 5.68%, as per the Simply Wall St company report.

engcon Future Earnings Per Share Growth

Risks

• Weak demand in the Nordic region has significantly impacted total revenue, with a SEK 225 million decrease that other regions have yet to compensate, highlighting potential revenue instability.
  
• While Europe has replaced the Nordic region as the largest market, the dependency on two primary markets (Europe and Nordics) for 80% of revenue could heighten revenue risks if any downturns occur.
  
• The decline in gross margin from 46% in Q3 to 43% in Q4, despite still being at a sustainable level, suggests fluctuations that may affect net margins.
  
• Potential tariffs in the U.S. due to political changes could impact costs and profitability in the American market, affecting earnings.
  
• Organizational changes and challenges in the U.S. market indicate potential instability, which could affect long-term growth projections and earnings consistency.

Valuation

• The analysts have a consensus price target of SEK110.0 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 SEK3.4 billion, earnings will come to SEK588.9 million, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 5.7%.
• Given the current share price of SEK95.2, the analyst price target of SEK110.0 is 13.5% 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.