European Defense Orders Will Offset Integration Challenges

Key Takeaways

• Geopolitical shifts or budgetary changes can delay expected revenue from high order backlogs, inflating current valuations without guaranteed growth.
  
• Currency volatility and integration costs from acquisitions might compress margins, impacting financial performance and future earnings expectations.
  
• Strong order intake, strategic acquisitions, and rising defense budgets in Europe support MilDef's revenue growth potential and market expansion.

Catalysts

Develops, manufactures, and sells rugged IT solutions in Sweden, Norway, Finland, Denmark, the United Kingdom, Germany, Switzerland, the United States, Australia, and internationally.

• The strong backlog and high order intake, especially in Europe and the Nordics, can lead to heightened revenue expectations. However, if future geopolitical or budgetary changes cause delays or cancellations, optimism may not translate to actual earnings growth, thus inflating current valuations.
  
• The acquisition of roda could affect net margins due to integration costs and the lower margins associated with increased reselling activities. Without anticipated revenue synergies materializing, the expected margin expansion may not occur, potentially affecting profitability.
  
• There is potential for short-term earnings volatility due to fluctuating defense spending in key markets. If increased budgets do not quickly convert into contracts, this could result in slower top-line growth than expected, impacting future earnings expectations.
  
• The company's ambitious growth in the European defense market may require significant capital expenditures, straining free cash flow. If MilDef cannot manage their working capital effectively, cash flow constraints might undermine market sentiment about its financial stability.
  
• Currency fluctuations, notably impacting operating costs and financial metrics, may introduce unpredictability into the earnings forecast. Such volatility could compress net margins unexpectedly, leading to discrepancies between current valuation expectations and future financial performance.

MilDef Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MilDef Group's revenue will grow by 43.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.3% today to 12.0% in 3 years time.
• Analysts expect earnings to reach SEK 423.7 million (and earnings per share of SEK 9.0) by about May 2028, up from SEK -220.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK509 million in earnings, and the most bearish expecting SEK376 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, up from -55.3x today. This future PE is lower than the current PE for the SE Aerospace & Defense industry at 44.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.78%, as per the Simply Wall St company report.

MilDef Group Future Earnings Per Share Growth

Risks

• MilDef has experienced a strong increase in order intake, up by 88% with a majority being organic, indicating sustained revenue growth potential. The increasing demand and strong order backlog (111% increase year-over-year) support future revenue growth.
  
• The successful acquisition of roda and its integration is strategically positioned to expand MilDef's presence in Europe, potentially boosting revenue and expanding market share.
  
• Rising defense budgets in Europe, including a significant increase in Sweden, create a promising market environment for defense sector suppliers like MilDef, offering potential revenue growth and enhanced earnings.
  
• MilDef has shown improvement in operating profit with an adjusted EBITA of SEK 15.7 million and a gross margin of 50.5% in legacy business, reflecting an ability to improve net margins despite FX-related losses.
  
• The scalability of roda’s business model and sustained growth in their top line suggests possible ongoing contributions to MilDef’s earnings, particularly given their 17% EBITA margin in 2024.

Valuation

• The analysts have a consensus price target of SEK224.375 for MilDef Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK280.0, and the most bearish reporting a price target of just SEK125.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK3.5 billion, earnings will come to SEK423.7 million, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of SEK259.0, the analyst price target of SEK224.38 is 15.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.