German Expansion And Local Acquisitions Will Improve Operational Efficiency

Key Takeaways

• Expansion into Germany and strategic acquisitions enhance revenue potential through geographic diversification and improved operational efficiencies in multidisciplinary services.
  
• Strong cash flow and increased service focus improve margins, supporting stable earnings and long-term profitability amidst uncertain market conditions.
  
• Decreased margins and financial shocks, along with acquisition costs and market challenges, indicate potential profitability and earnings risks for Instalco.

Catalysts

Provides installation services in the electrical, heating and plumbing, ventilation, technical consulting, and industrial areas in Sweden and rest of the Nordics.

• Instalco has expanded into the German market, which could drive future revenue growth by diversifying its geographical presence and tapping into a new market.
  
• The company's focus on service business, which grew 14% in the quarter and now constitutes 36% of sales, could help enhance net margins as service contracts typically have higher margins compared to project-based revenue.
  
• Instalco's strategy of acquiring local companies in clusters and enhancing multidisciplinary capabilities may improve operational efficiencies and increase revenue opportunities.
  
• The order backlog showed organic growth, indicating potential for future revenue improvement as these orders are fulfilled and market conditions stabilize.
  
• The company's strong cash flow and focus on working capital improvements could lead to more stable earnings and a strengthened financial position, supporting long-term profitability initiatives.

Instalco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Instalco's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 6.3% in 3 years time.
• Analysts expect earnings to reach SEK 1.0 billion (and earnings per share of SEK 2.82) by about May 2028, up from SEK 284.0 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 15.2x on those 2028 earnings, down from 25.4x today. This future PE is lower than the current PE for the GB Construction industry at 16.1x.
• 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 5.89%, as per the Simply Wall St company report.

Instalco Future Earnings Per Share Growth

Risks

• The decrease in EBITA margin from 7.6% to 6.6% due to price pressure and one-off costs suggests profitability challenges, which could harm future earnings.
  
• The significant one-off expense related to Northvolt's bankruptcy impacted financials by SEK 64 million, indicating potential risk to earnings from external financial shocks.
  
• Acquisition and integration costs in the competitive German market may strain resources, potentially affecting net margins if anticipated synergies are not realized.
  
• Continued tough pricing environments and market challenges in Finland and Norway reflect uncertainty in revenue growth and margin sustainability.
  
• Leveraged positions above the target ratio suggest financial strain in the current market, risking net income if interest expenses rise or further credit is needed.

Valuation

• The analysts have a consensus price target of SEK48.333 for Instalco 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 SEK16.2 billion, earnings will come to SEK1.0 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of SEK26.88, the analyst price target of SEK48.33 is 44.4% 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.