Energy Transition, Urbanization And Digitalization Will Expand Orders

Key Takeaways

• Strategic positioning in energy transition and digital services, supported by acquisitions and expertise, drives strong growth prospects across diverse high-margin sectors and geographies.
  
• Ongoing operational restructuring and focus on high-value, long-term contracts are likely to yield greater-than-expected margin improvement and recurring revenue stability.
  
• Rising geopolitical risks, automation threats, talent shortages, reliance on public spending, and persistent integration challenges could undermine Afry's revenue stability, margins, and international growth.

Catalysts

Provides engineering, design, and advisory services for the infrastructure, industry, and energy sectors in the Nordics, North America, South America, Asia, rest of Europe, and internationally.

• Analyst consensus expects Energy division strength from the energy transition, but this demand is likely to accelerate further as nations invest heavily in nuclear, solar, and wind, with Afry especially well positioned thanks to recent project wins and recognized nuclear expertise, supporting potential for sustained double-digit revenue growth and above-market backlog expansion.
  
• Analysts broadly see operational restructuring mainly as a means to improve margins, but with management estimating a hefty SEK 200–300 million in restructuring initiatives, a rapid payback, and a modernized group structure, the margin uplift could be materially higher than expected-potentially driving EBITA margin expansion well above management's 100–200 basis point estimate given additional efficiency and utilization gains.
  
• Afry's recent and ongoing acquisition strategy, such as the move into Latin America with Reta Engenharia, gives it significant optionality for accelerated top-line growth and earnings accretion by gaining exposure to high-growth emerging markets and critical sectors like mining and metals, well beyond the slow-growth European core.
  
• The company is set to benefit disproportionately from surging demand for digitalization and automation in industrial and energy sectors, given its expertise in digital consulting and cross-segment integration, likely increasing high-margin recurring digital service revenues and improving overall revenue quality and predictability.
  
• Structural mega-trends in urbanization, smart infrastructure, and heightened ESG and regulatory requirements are driving a secular expansion of high-value, multi-year projects in core segments such as defense, infrastructure, and sustainable cities, giving Afry a unique opportunity to expand both its order backlog and profit pool through lifecycle service contracts and end-to-end solutions, ultimately boosting long-term earnings.

Afry Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Afry compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Afry's revenue will grow by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.6% today to 7.1% in 3 years time.
• The bullish analysts expect earnings to reach SEK 2.1 billion (and earnings per share of SEK 18.87) by about July 2028, up from SEK 941.0 million today. The analysts are largely in agreement about this estimate.
• 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 14.9x on those 2028 earnings, down from 18.7x today. This future PE is lower than the current PE for the GB Professional Services industry at 17.6x.
• 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 5.77%, as per the Simply Wall St company report.

Afry Future Earnings Per Share Growth

Risks

• Rising geopolitical instability and increased protectionism could restrict Afry's cross-border activities and access to international projects, potentially reducing long-term revenue growth as seen in the company's acknowledgment of varied regional demand and continued market uncertainty.
  
• Acceleration of AI-driven automation poses a threat to Afry's traditional consulting and engineering services, which may disrupt demand and pressure fee structures, ultimately impacting net margins and limiting earnings growth if the company fails to adapt its offerings accordingly.
  
• Sector-wide skills shortages and talent retention challenges, combined with restructuring initiatives largely focused on personnel reductions, suggest that payroll costs could rise and Afry may struggle to maintain service quality, placing continued pressure on net margins and future profitability.
  
• Over-reliance on public sector and infrastructure spending in core Nordic markets leaves Afry exposed to cyclical policy shifts and cutbacks, which could reduce predictability and stability of revenues over the long term, as reflected by management's emphasis on market timing and stalled client investment decisions.
  
• Persistent integration risks from recent acquisitions-such as Reta Engenharia in Brazil-may lead to higher operational costs, diluted expected synergies, and slower margin expansion, which could weigh on future earnings and hinder the company's ability to achieve profitable growth through international expansion.

Valuation

• The assumed bullish price target for Afry is SEK240.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Afry'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 SEK240.0, and the most bearish reporting a price target of just SEK165.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be SEK30.2 billion, earnings will come to SEK2.1 billion, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 5.8%.
• Given the current share price of SEK155.3, the bullish analyst price target of SEK240.0 is 35.3% 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.