Positive Market Outlook Will Drive Future Performance In Infrastructure And Industry Segments

Key Takeaways

• Positive market outlook in key segments could drive revenue growth and improve earnings through operational efficiencies and higher margins.
  
• Property market recovery and strategic focus on rental income promise to enhance future earnings and cash flow.
  
• Persistent property market challenges, higher financing costs, and increased expenses risk suppressing NCC's revenue growth and profitability across various segments.

Catalysts

Operates as a construction company in Sweden, Norway, Denmark, and Finland.

• NCC Group is benefiting from a positive market outlook with underlying demand in Infrastructure, Industry, and Public Market segments, which could drive future revenue growth.
  
• Improvements in Building Nordics, alongside stability in Infrastructure and Building Sweden, indicate stronger operational efficiencies and margins leading to potential earnings growth in these areas.
  
• The improvement in the Industry segment, with increased orders received and improved earnings, suggests potential for higher future margins and profitability.
  
• Lower interest rates are expected to positively influence the sluggish property market, likely leading to increased property transactions and higher revenue from this segment.
  
• NCC is focusing on achieving higher rental income from their property development projects, with expectations for increased letting and divestment positively impacting future earnings and cash flow.

NCC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCC's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 2.4% in 3 years time.
• Analysts expect earnings to reach SEK 1.5 billion (and earnings per share of SEK 15.19) by about February 2028, up from SEK 1.2 billion 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 14.8x on those 2028 earnings, up from 14.5x today. This future PE is lower than the current PE for the GB Construction industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

NCC Future Earnings Per Share Growth

Risks

• Challenges in the property market persist, with slow transactions and a significant number of unsold developments, which could hinder revenue growth and earnings.
  
• Higher financing costs due to increased net debt and higher interest rates may pressure net margins and earnings.
  
• Reduced sales in the Building Nordics segment, attributed to challenges in Finland, highlight market-specific risks that can affect overall revenue and profit margins.
  
• Increased common group costs, particularly from IT development, could raise operating expenses, negatively impacting net margins.
  
• Limited profit recognition in Property Development due to low letting ratios and the absence of property starts or sales may restrict potential earnings and overall financial performance.

Valuation

• The analysts have a consensus price target of SEK187.0 for NCC 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 SEK60.8 billion, earnings will come to SEK1.5 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK184.1, the analyst price target of SEK187.0 is 1.6% higher. 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.