Science Based Targets Initiative Validation Will Strengthen Collaboration And Lead To New Contracts

Key Takeaways

• Divesting loss-making operations will enhance profitability and focus on more profitable markets, improving net margins.
  
• All-time high order backlog and extended contracts in Telecom and Power signal strong future sales growth.
  
• The company's profitability is challenged by competition, loss-making operations, and reduced margins, impacting future earnings and growth potential.

Catalysts

Provides construction and maintenance services for communication infrastructure and power networks in Sweden, Norway, Finland, Germany, and the United Kingdom.

• The divestment of loss-making operations in Finland is expected to enhance profitability by allowing the company to focus on more profitable markets such as Sweden, Norway, Germany, and the UK, which can lead to improved net margins.
  
• Strong market positions in Sweden and Norway with significant growth opportunities are likely to drive revenue growth, supported by extended contracts and geographic expansions in key industries such as Telecom and Power.
  
• The all-time high order backlog of SEK 4 billion, including new significant contracts within Telecom and Power, indicates a robust revenue pipeline, which is likely to drive future sales growth.
  
• Implementation of a new business system and digital tools is expected to improve operational efficiencies, resource allocation, and margins, thereby positively impacting earnings.
  
• Recent validation of climate targets by the Science Based Targets initiative can enhance collaboration with business partners and customers, potentially leading to new contracts and an increase in both revenue and net margins.

Netel Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Netel Holding's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.8% in 3 years time.
• Analysts expect earnings to reach SEK 202.4 million (and earnings per share of SEK 4.17) by about February 2028, up from SEK 58.0 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 6.8x on those 2028 earnings, down from 11.1x today. This future PE is lower than the current PE for the SE Construction industry at 18.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Netel Holding Future Earnings Per Share Growth

Risks

• The profitability of Netel's Telecom division was negatively impacted by lower volumes and increased competition, resulting in a reduced EBITDA margin, which could hinder future earnings growth.
  
• The Finland operations are loss-making, with a net profit after tax of minus SEK 105 million, and their divestment could strain short-term net margins and profitability until closing in 2025.
  
• The company's cash flow was negatively affected by fewer finalized projects and significant one-off costs, which could limit its ability to fund future growth initiatives and impact liquidity.
  
• High competition in the Infraservices market led to lower margins, posing a risk to future revenue and profitability as similar competitive pressures could continue.
  
• The adjusted EBITDA margin decreased from 5.7% to 5.2%, mainly due to weaker performance in Telecom and Infraservices, indicating profitability challenges that may impede future earnings improvements.

Valuation

• The analysts have a consensus price target of SEK22.0 for Netel Holding 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 SEK4.2 billion, earnings will come to SEK202.4 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of SEK13.22, the analyst price target of SEK22.0 is 39.9% higher.
  
• 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.