Focus On In-Vitro Diagnostics Will Strengthen Future Prospects In Medical Solutions

Key Takeaways

• Nolato's transformation and innovation in Engineered Solutions enhance profit margins and could boost revenue through favorable product mixes.
  
• Strategic focus in Medical Solutions on high-demand areas supports revenue growth with strong cash flow enabling acquisitions and investments.
  
• Uncertain future revenue growth, potential profitability impacts, and strategic investments suggest cautious optimism amid operational adjustments and acquisition risks.

Catalysts

Develops, manufactures, and sells plastic, silicone, and thermoplastic elastomer products for medical technology, pharmaceutical, consumer electronics, telecom, automotive, hygiene, and other industrial sectors in Sweden, Other Nordic countries, Asia, Rest of Europe, and North America, and internationally.

• Nolato's transformation in its Engineered Solutions business area has started to yield growth, particularly with a favorable product mix enhancing profit margins. Continued restructuring and innovation in this area could further boost revenue and margins.
  
• The Medical Solutions segment has seen a strategic focus on high-demand areas like in-vitro diagnostics and drug delivery, which are expected to continue driving revenue growth and improving margins through efficiency and pricing strategies.
  
• Strong cash flow and low net financial liabilities provide a robust financial position that supports future growth through possible acquisitions and strategic investments, potentially boosting earnings.
  
• The ongoing investment in new medical projects and the expansion of production capacity show promise for future revenue increases, which are supported by anticipated CapEx investments between SEK 800 million to SEK 850 million in 2025.
  
• Nolato's strategic market position in growing sectors such as consumer electronics and telecoms in the Engineered Solutions area could lead to increased revenue from improving economic conditions and technological advancements in these markets.

Nolato Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nolato's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 8.5% in 3 years time.
• Analysts expect earnings to reach SEK 985.0 million (and earnings per share of SEK 3.66) by about February 2028, up from SEK 658.0 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 20.7x on those 2028 earnings, down from 25.5x today. This future PE is lower than the current PE for the GB Industrials industry at 33.7x.
• 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 5.39%, as per the Simply Wall St company report.

Nolato Future Earnings Per Share Growth

Risks

• The gradual recovery in the telecom segment contributing to a 20% growth rate is acknowledged to be partly due to a weak comparison from the previous year, suggesting that this level of growth may not be sustainable, possibly affecting future revenue growth for the segment.
  
• The automotive sector showed lower volumes, with an expected negative impact at the start of 2025, potentially reducing overall revenue and impacting profitability within the Engineered Solutions business area.
  
• Excess capacity in China after consolidating operations to the southern part implies higher costs, which could exert pressure on net margins if not offset by increased utilization and growth in new areas.
  
• Despite strong financials and increased earnings, the dividend remains flat, potentially indicating a cautious outlook toward future earnings or an intention to reserve funds for potential acquisitions, which carry integration risks that could impact net margins and overall profitability.
  
• The need for significant investments, such as the SEK 140 million medical project, indicates capital allocation toward long-term growth but could constrain short-term cash availability, affecting overall free cash flow and potentially impacting earnings.

Valuation

• The analysts have a consensus price target of SEK64.75 for Nolato 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 SEK11.6 billion, earnings will come to SEK985.0 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK62.2, the analyst price target of SEK64.75 is 3.9% 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.