Critical Acquisitions And Profit Discipline To Boost Future Profitability And Resilience

Key Takeaways

• Strategic acquisitions boost Lifco's revenue, providing future growth potential through integration and performance improvement of acquired businesses.
  
• Strong profit culture and disciplined cost management target improved profitability and resilient earnings amid market challenges.
  
• Lifco's financial health faces challenges due to weak market conditions, declining profitability, cash flow risks, reliance on acquisitions, and impacts from higher interest rates.

Catalysts

Engages in the dental, demolition and tools, and systems solutions businesses in Sweden, Norway, Germany, rest of Europe, the United Kingdom, Asia, Australia, Italy, North America, and internationally.

• Lifco has been actively acquiring companies, adding around 1.7 billion SEK of revenue over the past year. This strategy could drive future revenue growth as these acquisitions become integrated and begin to contribute more significantly to the company's overall performance.
  
• The Dental business area is showing stable development with 7.5% EBITA growth for the 9-month period, combining both organic and acquisition growth. This stability could lead to improved net margins in the future as this segment is less exposed to cyclical market fluctuations.
  
• Lifco maintains a low net debt to EBITDA ratio of 1.2x, which provides flexibility to pursue further strategic acquisitions. This could enhance earnings through additional top-line growth and potentially higher-margin contributions from newly acquired businesses.
  
• The Contract Manufacturing subdivision within Systems Solutions is experiencing higher than normal organic growth. While the sustainability of this growth is uncertain, continued performance could bolster revenue and provide a diversified earnings stream, offsetting weakness in other areas.
  
• Lifco's operational focus and strong profit culture aim to defend and improve profitability even in challenging market conditions. This disciplined approach, combined with cost management, could lead to resilient earnings and potentially improved margins when market conditions recover.

Lifco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lifco's revenue will grow by 12.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.7% today to 14.4% in 3 years time.
• Analysts expect earnings to reach SEK 5.3 billion (and earnings per share of SEK 10.4) by about November 2027, up from SEK 3.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.8x on those 2027 earnings, down from 46.6x today. This future PE is greater than the current PE for the GB Industrials industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 3.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.0%, as per the Simply Wall St company report.

Lifco Future Earnings Per Share Growth

Risks

• Lifco's Demolition & Tools business is facing weak market conditions, impacting organic sales and causing a decline in net sales and EBITA, which could negatively affect overall margins and earnings.
  
• The group’s most profitable segment, Demolition & Tools, experienced an EBITA decline of 15% this quarter, reducing the group's overall profitability and impacting net margins.
  
• Lifco's decline in operating cash flow during the quarter, due to higher cash tax payments, presents a risk to liquidity and cash availability for future investments or operational needs.
  
• The continued reliance on acquisitions for growth, despite uncertainty in acquisition outcomes, presents potential financial risks and unpredictability in future revenue and net margin improvements.
  
• The presence of higher interest rates influencing capital goods delivery companies in Systems Solutions poses a risk to revenue stability and profitability in those subdivisions.

Valuation

• The analysts have a consensus price target of SEK 330.5 for Lifco 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 2027, revenues will be SEK 36.6 billion, earnings will come to SEK 5.3 billion, and it would be trading on a PE ratio of 36.8x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of SEK 330.8, the analyst's price target of SEK 330.5 is 0.1% lower. 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.