Green Transition M&A Acceleration And Automation Exposure Will Drive Long Term Upside

Catalysts

About Storskogen Group

Storskogen Group is a diversified international business group that acquires and develops profitable small and mid-sized companies with strong cash generation.

What are the underlying business or industry changes driving this perspective?

• Reacceleration of M&A with a growing pipeline of high margin platform and add on acquisitions in areas such as digital solutions, health and well-being and energy infrastructure is set to lift group sales growth and support higher blended EBITA margins and earnings.
• Exposure to long term drivers like automation and digitalization through high performing project oriented industrial and software businesses should translate solid order books into sustained organic revenue growth and improving capacity utilization, supporting EBITA and operating leverage.
• Participation in the green transition and energy and infrastructure investment themes via businesses such as Wibe and related add ons positions Storskogen to benefit from multi year capex cycles, underpinning resilient revenues and structurally stronger margins.
• Systematic focus on cost efficiency, productivity improvements and mix shift towards higher margin niches in Services, Trade and Industry is expected to convert even modest top line growth into expanding net margins and rising return on capital employed.
• Strengthened balance sheet, reduced net interest costs and no debt maturities until 2027 enable more aggressive capital allocation toward growth acquisitions and share buybacks, directly enhancing EPS and supporting a rerating as financial risk declines.

Assumptions

This narrative explores a more optimistic perspective on Storskogen Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Storskogen Group's revenue will grow by 3.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.2% today to 6.9% in 3 years time.
• The bullish analysts expect earnings to reach SEK 2.5 billion (and earnings per share of SEK 1.53) by about December 2028, up from SEK 1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK2.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, down from 17.8x today. This future PE is lower than the current PE for the SE Industrials industry at 27.9x.
• The bullish 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 6.57%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Longer lasting weakness in global industrial activity and muted construction markets, already reflected in soft demand and lower capacity utilization in Industrial Technologies, Product Solutions and infrastructure services, could persist beyond 2027, limiting organic revenue growth and constraining EBITA expansion and earnings growth.
• The acquisition strategy assumes continued access to high margin assets at attractive multiples, but structurally higher competition for quality targets or a turn in the M&A cycle could force Storskogen to accept lower quality or lower margin acquisitions, diluting group EBITA margin and restraining future earnings growth.
• The portfolio is increasingly exposed to consumer driven categories such as Health and Beauty and Sports Accessories, which are currently benefiting from improved sentiment, but any renewed pressure on Nordic household spending or a cyclical downturn in discretionary demand could reduce Trade segment revenue growth and erode net margins.
• Currency translation and transactional FX effects, already contributing a structural drag on reported sales and EBITA, could remain unfavorable if the Swedish krona strengthens over the long term or if exposure to non SEK earnings increases, weighing on reported revenue, operating profit and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Storskogen Group is SEK18.5, which represents up to two standard deviations above the consensus price target of SEK16.0. This valuation is based on what can be assumed as the expectations of Storskogen Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK18.5, and the most bearish reporting a price target of just SEK12.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be SEK36.6 billion, earnings will come to SEK2.5 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of SEK11.2, the analyst price target of SEK18.5 is 39.5% 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.