Streamlining Operations And Leveraging Energy Growth Will Strengthen Future Prospects

Key Takeaways

• AFRY's focus on large projects in Energy, Industry, and Infrastructure may drive growth by boosting backlog and future revenues.
  
• Streamlining operations and a successful infrastructure program could enhance cost efficiency and improve margins across divisions.
  
• Continued challenges across key segments and reliance on volatile projects may strain sales growth and profitability, impacting overall earnings and cash flow.

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 is focusing on leveraging its strong position in Energy, Industry, and Infrastructure to drive growth, particularly by capitalizing on large projects and increasing its backlog, which should lead to higher future revenues.
  
• The company plans to streamline its operations to reduce complexity, which is expected to enhance cost efficiency and potentially improve net margins.
  
• Infrastructure division's successful improvement program is consistently enhancing margins, providing AFRY with a solid foundation for margin improvement across other divisions.
  
• The Energy sector has demonstrated strong demand and profitability, with expectations of continued growth in energy production, transmission, and storage, potentially boosting AFRY's earnings.
  
• AFRY is strengthening its core business and client offerings, focusing on complex and large-scale projects, which could drive higher-value contract wins and improved earnings per share.

Afry Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Afry's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.3% in 3 years time.
• Analysts expect earnings to reach SEK 2.0 billion (and earnings per share of SEK 17.43) by about April 2028, up from SEK 1.2 billion 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 16.4x on those 2028 earnings, down from 17.3x today. This future PE is greater than the current PE for the GB Professional Services industry at 13.8x.
• 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 5.54%, as per the Simply Wall St company report.

Afry Future Earnings Per Share Growth

Risks

• Continued weakness in the Pulp & Paper segment and a challenging Real Estate market could strain overall sales growth, impacting net margins and earnings.
  
• Negative calendar effects leading to lower available working hours are anticipated for 2025, which may limit EBITDA margin improvements.
  
• Reduced utilization rates in the Industrial & Digital Solutions division due to the new Agency Work Act could further decrease profitability in this segment, affecting earnings.
  
• The company's broad portfolio and operational complexities, as mentioned, could hinder the ability to improve profitability and streamline operations, thereby impacting net margins.
  
• Reliance on larger projects in volatile markets could pose risks to consistent revenue streams, as downturns or delays in these projects can significantly affect earnings and cash flow.

Valuation

• The analysts have a consensus price target of SEK244.0 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 16.4x, assuming you use a discount rate of 5.5%.
• Given the current share price of SEK187.2, the analyst price target of SEK244.0 is 23.3% 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.