Potential Sale Of Industry Division Will Impact Future Revenue

Key Takeaways

• Potential divestment may threaten revenue and earnings stability without a substitute for lost income.
  
• Inflation-related risks and higher debt costs could compress margins and hinder future earnings.
  
• NCC's strong cash flow, net sales growth, and disciplined risk management position the company for improved financial performance and sustainable profit growth.

Catalysts

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

• The strategic review of NCC Industry suggests potential divestment, raising concerns about future revenue and earnings stability if the business is sold without a solid replacement for lost income.
  
• Despite record profit recognition in 2024, the cautious outlook on commercial property transactions indicates potential stagnation in Property Development revenue, which could affect overall profitability.
  
• The provision of SEK 250 million due to inflation-related risks in Building Sweden highlights underlying project risk management issues, potentially compressing net margins and impacting future earnings stability.
  
• The expectation of no material improvement in Building Sweden's backlog from past projects suggests limited revenue growth and potential earnings constraints as past projects clear with no significant margin improvements.
  
• The increase in net financial expenses due to higher average debt and inability to capitalize on interest reflects pressure on net margins and future earnings as interest costs rise without offsetting income from large transactions.

NCC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCC's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.6% today to 2.4% in 3 years time.
• Analysts expect earnings to reach SEK 1.5 billion (and earnings per share of SEK 15.73) by about April 2028, down from SEK 1.6 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 15.4x on those 2028 earnings, up from 11.9x today. This future PE is lower than the current PE for the GB Construction industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.39%, as per the Simply Wall St company report.

NCC Future Earnings Per Share Growth

Risks

• NCC reported an all-time high earnings for multiple business areas and a strong cash flow for the year, indicating robust financial health that could improve earnings.
  
• The company has healthy net sales growth, impacted by both strong property development performance and high order intake in areas like infrastructure and industry, which supports potential revenue growth.
  
• Record high cash flows and a strategic review of the Industry division imply a high financial flexibility, which may lead to efficient capital allocation and potentially stronger financial performance.
  
• NCC has maintained a disciplined approach to tenders, which includes lower risk profiles for newer projects, potentially leading to improved net margins due to reduced risk exposure in the future.
  
• The dividend increase and the proposed extraordinary dividend indicate confidence from the Board in NCC's financial health and ability to deliver strong future profits.

Valuation

• The analysts have a consensus price target of SEK200.0 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 SEK63.5 billion, earnings will come to SEK1.5 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of SEK191.5, the analyst price target of SEK200.0 is 4.2% 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.