Industrial Investments In Energy Transition Will Create Future Project Opportunities

Key Takeaways

• AFRY's growth in energy and infrastructure is driven by strategic investments and operational improvements, enhancing revenue and margin potential.
  
• Focus on core businesses and client value is poised to boost long-term profitability and earnings as AFRY adapts to market demands.
  
• Operational inefficiencies and low demand in key sectors could pressure net margins, while high-risk projects expose AFRY to earnings volatility.

Catalysts

Provides engineering, design, and advisory services for the infrastructure, industry, energy, and digitalization sectors in North and South America, Finland, and Central Europe.

• AFRY's strong performance in the Energy sector, driven by industrial investments in the energy transition, is expected to support revenue growth as they capitalize on new projects in production, transmission, and storage.
  
• The improvement program in Infrastructure, which has led to margin enhancements, is anticipated to continue yielding better net margins through increased operational efficiency and process optimization.
  
• The order backlog increase, particularly in the Energy division, suggests AFRY's potential for stable future revenue, as they maintain a strong pipeline of projects despite market challenges in other segments.
  
• Management's focus on streamlining and reducing operational complexities is aimed at enhancing profitability, which could improve net margins by reducing overheads and improving operational efficiencies.
  
• The strategic actions to focus on core businesses and enhance client value are expected to yield profitable growth and improve earnings over the long term as AFRY adapts its offerings to meet evolving client demands in integrated and large-scale projects.

Afry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Afry's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.5% in 3 years time.
• Analysts expect earnings to reach SEK 2.0 billion (and earnings per share of SEK 17.81) by about February 2028, up from SEK 1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 18.5x today. This future PE is greater than the current PE for the GB Professional Services industry at 13.5x.
• 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 5.45%, as per the Simply Wall St company report.

Afry Future Earnings Per Share Growth

Risks

• The ongoing challenges in the Pulp & Paper segment, particularly in Europe, present risks to revenue growth and profitability, as low demand in these sectors could adversely impact AFRY's financial performance.
  
• Utilization rates are under pressure, affected by regulatory changes like the Agency Work Act. Continued low utilization rates could squeeze net margins if not addressed effectively.
  
• The Industrial & Digital Solutions division is facing weak demand, particularly in IT and telecom, which may hinder revenue growth and affect earnings if the market does not recover.
  
• Complexity in operations due to the company’s broad portfolio can lead to inefficiencies. This operational complexity might pressure net margins unless successfully streamlined.
  
• The company’s focus on high-risk, large-scale projects could expose it to volatility in earnings, as these projects often come with higher execution and financial risks.

Valuation

• The analysts have a consensus price target of SEK231.667 for Afry 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 SEK31.2 billion, earnings will come to SEK2.0 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK200.4, the analyst price target of SEK231.67 is 13.5% 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.