Acquiring Roda Will Open Central European Markets In Defense Sector

Key Takeaways

• Strategic shift to defense sector and acquisition expansion likely to improve revenue and margins amid growing defense spending.
  
• Strong order backlog and high demand in Nordic countries signal robust future revenue growth and operational scalability.
  
• Expansion strategies and market reliance pose risks, with potential revenue impact from defense budget fluctuations, integration challenges, and operational or geopolitical pressures.

Catalysts

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

• The acquisition of the German company roda is expected to open up new markets in Central Europe, unlocking significant future growth potential for MilDef, which should impact future revenue levels positively.
  
• A strategic decision to focus fully on the defense sector is anticipated to position MilDef advantageously in response to increased defense spending in their core markets, which is expected to boost future revenue and potentially expand net margins.
  
• The company has a record-high order backlog, which indicates a strong future revenue stream as these orders are fulfilled over the coming years.
  
• The significant increase in order intake, especially from Nordic countries, suggests continued demand for their products, which should support revenue growth and operational scalability, impacting future earnings.
  
• MilDef's successful capital raising and anticipated acquisition approval process completion should support their strategic expansion plans, potentially enhancing both revenue growth and profit margins as synergies are realized.

MilDef Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MilDef Group's revenue will grow by 40.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.3% today to 10.6% in 3 years time.
• Analysts expect earnings to reach SEK 356.5 million (and earnings per share of SEK 7.82) by about February 2028, up from SEK -220.3 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 25.3x on those 2028 earnings, up from -31.2x today. This future PE is lower than the current PE for the SE Aerospace & Defense industry at 33.4x.
• 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 4.86%, as per the Simply Wall St company report.

MilDef Group Future Earnings Per Share Growth

Risks

• Although MilDef reported strong historical performance and demand, future growth could be hampered by the general state of the European defense market, and fluctuations in defense budgets could impact MilDef’s revenue stability and growth potential.
  
• The acquisition of roda, aimed at expanding market reach, introduces integration risk. Any operational setbacks during this process could affect earnings and profitability if synergies are not realized as expected.
  
• The company sees potential in concentrating on the defense sector, but over-reliance on this market could pose a risk if geopolitical or technological shifts lead to reduced defense spending, affecting future revenue channels.
  
• The company’s growth in order intake and backlog are positive indicators, but if they face challenges in fulfilling these orders due to delivery capacity or supply chain constraints, it may impact net sales and margins adversely.
  
• While their operational spending has been managed effectively thus far, unexpected increases in operating expenses or capital expenditures required to sustain growth could squeeze net margins and affect earnings.

Valuation

• The analysts have a consensus price target of SEK142.5 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 SEK170.0, 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 SEK3.4 billion, earnings will come to SEK356.5 million, and it would be trading on a PE ratio of 25.3x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of SEK151.0, the analyst price target of SEK142.5 is 6.0% 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.