Investments In Engineered Solutions And Medical Sectors Expected To Strengthen Future Outlook

Key Takeaways

• Strategic focus on engineered and medical solutions, along with new technologies, is positioned to drive growth in consumer electronics and hygiene sectors.
  
• Strong cash flow and strategic investments in high-growth sectors like in-vitro diagnostics support future expansion and margin improvements.
  
• Nolato faces risks in automotive decline, sustainability of telecom growth, and excess Chinese capacity, impacting future revenue, profitability, and earnings stability.

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.

• The introduction of the new Engineered Solutions business area, coupled with changes in the product mix, is expected to drive future growth, particularly in consumer electronics and hygiene, impacting revenue positively.
  
• The company has a strong cash flow and financial position which enables further growth and expansion through customer collaboration and potential acquisitions, likely boosting earnings in the long run.
  
• Medical Solutions has shown effective margin improvements due to strategic price revisions and cost savings, and continued focus on enhancing efficiency and pricing strategy is expected to bring margins up to historical levels, benefiting net margins.
  
• Investments in the high-growth potential sector of in-vitro diagnostics and long-term focus on areas like drug delivery and cardiology are poised for future revenue growth.
  
• Planned capital expenditure on a new medical project signals anticipated growth efforts in new technologies and sectors, aiming to enhance both revenue and operating margins over time.

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 March 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 24.8x today. This future PE is lower than the current PE for the GB Industrials industry at 32.4x.
• 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 5.44%, as per the Simply Wall St company report.

Nolato Future Earnings Per Share Growth

Risks

• Despite strong growth in some areas, Nolato's automotive sector is experiencing a decline and is expected to have a negative impact at the start of 2025, which could adversely affect overall revenue and profitability.
  
• The company’s margin improvements in 2024 and projected for 2025 rely significantly on strategic pricing revisions and cost savings, which might not be sustainable in the long term, potentially impacting future net margins.
  
• There is uncertainty about the sustainability of the strong growth experienced in the telecom sector, which had a weak comparison period. This raises concerns about whether such high growth rates will continue, impacting future earnings stability.
  
• With excess capacity in its Chinese production facilities, there is a risk that the significant investment might not quickly translate into new business, which could weigh on operating profitability in the near term.
  
• Medical segment growth relies heavily on maintaining margin improvements through strategic actions. If these actions do not lead to sustained growth or margins, it could negatively impact earnings projections for Nolato.

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 SEK60.7, the analyst price target of SEK64.75 is 6.3% 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.