New Global Divisions Will Simplify Energy And Industrial Operations

Key Takeaways

• Anticipated growth in the Energy division and strategic projects could boost revenue due to strong demand and order backlogs.
  
• New group structure and focused operations model are expected to enhance profitability, with management changes accelerating long-term earnings growth.
  
• Ongoing challenges in sales, negative growth, and high expenses could pressure revenue, net margins, and overall profitability.

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.

• AFRY is anticipating growth in the Energy division due to strong demand driven by the energy transition, which should positively impact revenue.
  
• The new group structure, effective from July 2025, aims to simplify operations, improve utilization, and address cost base inefficiencies, leading to enhanced net margins.
  
• The development of strategic client projects, such as automated forest plant production and offshore wind farms, offers AFRY the potential for increased order backlogs and future revenue growth.
  
• The consolidation into three global divisions (Energy, Industry, and Transportation & Places) with a focused operational model is expected to enhance profitability and earnings by aligning resources more efficiently.
  
• Management changes and the updated strategy to be launched in the second half of 2025 are focused on accelerating profitable growth, which could improve earnings in the long term.

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 4.2% today to 6.9% in 3 years time.
• Analysts expect earnings to reach SEK 2.1 billion (and earnings per share of SEK 16.18) by about May 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 SEK1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, down from 16.9x today. This future PE is greater than the current PE for the GB Professional Services industry at 14.3x.
• 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 5.61%, as per the Simply Wall St company report.

Afry Future Earnings Per Share Growth

Risks

• The slight decline in sales and profitability pressures in some divisions suggest potential ongoing challenges that could further impact revenue and net margins.
  
• The continued negative organic growth in certain divisions, such as Industrial & Digital Solutions and Process Industries, raises concerns about the company's overall growth trajectory and revenue stability.
  
• The impact of the global tariff situation and market uncertainty may lead to delayed client investment decisions, which could negatively affect future earnings.
  
• The slow ramp-up and lower utilization levels indicate inefficiencies that might continue to pressure net margins and hinder the company's profitability improvement efforts.
  
• Elevated restructuring and IT licensing costs, along with anticipated restructuring associated with the new group structure, may increase expenses and reduce net margins if not offset by corresponding cost savings.

Valuation

• The analysts have a consensus price target of SEK233.0 for Afry based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK265.0, and the most bearish reporting a price target of just SEK200.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK31.1 billion, earnings will come to SEK2.1 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of SEK167.5, the analyst price target of SEK233.0 is 28.1% 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.