Acquisition Of ST&L Will Expand Service Offerings And Improve Machine Safety Capabilities

Key Takeaways

• Strategic acquisitions and geographic expansion could boost Troax Group's revenue through enhanced service offerings and new market penetration.
  
• Strong financial position supports growth investments, with potential for increased earnings from maintained gross margins and improved market conditions.
  
• Weak European demand and reliance on acquisitions create revenue risks, while high sales expenses and market volatility pressure margins and earnings stability.

Catalysts

Through its subsidiaries, produces and sells mesh panels in the Nordic region, the United Kingdom, North America, Continental Europe, and internationally.

• The strategic acquisition of ST&L is expected to enhance Troax Group's service offerings and improve its capabilities in machine safety, potentially leading to increased revenue as the company can offer more comprehensive solutions to customers.
  
• Investments in growth through expanding into additional countries and geographies, as well as initiatives in the Active Safety segment, suggest potential future revenue increases as these markets and segments are developed.
  
• The return to organic order intake growth in the fourth quarter, despite challenging market conditions, indicates a potential upward trend in future revenue growth as market conditions stabilize or improve.
  
• The company's low net debt-to-EBITDA ratio of 0.8 and strong operational cash flow enable further growth investments, which may enhance future earnings as these investments begin to yield results.
  
• Continued pricing discipline combined with stable raw material costs have helped maintain gross margins, which could improve earnings if market conditions allow for increased sales volumes.

Troax Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Troax Group's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 15.5% in 3 years time.
• Analysts expect earnings to reach €56.6 million (and earnings per share of €0.81) by about March 2028, up from €31.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €48.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, down from 33.0x today. This future PE is greater than the current PE for the GB Machinery industry at 25.3x.
• 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 5.89%, as per the Simply Wall St company report.

Troax Group Future Earnings Per Share Growth

Risks

• Weak demand in Europe and decline in certain European markets could negatively impact revenue and net margins if these trends persist.
  
• Sales and marketing expenses are high relative to revenues, and strategic growth investments have not yet fully paid off, which could pressure net margins in the short term.
  
• The company's reliance on acquisitions to drive growth, such as the ST&L acquisition, poses a risk if these do not yield the expected revenue synergies or if integration challenges arise.
  
• Organic sales decline by 7% in the fourth quarter, offset by acquisitions and FX, indicates potential issues in sustaining revenue growth without external factors or acquisitions.
  
• Market conditions and customer-specific swings in order intake and geographic demand variation, especially in newer markets like APAC, create volatility that could impact predictable revenue streams and earnings stability.

Valuation

• The analysts have a consensus price target of SEK260.704 for Troax Group 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 €365.7 million, earnings will come to €56.6 million, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of SEK190.2, the analyst price target of SEK260.7 is 27.0% 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.