Wonderway Acquisition And AI Integration May Boost Prospects, But Margin Pressures Expected

Key Takeaways

• Acquisitions and AI integration are expected to enhance competitiveness, reduce costs, and improve net margins and earnings.
  
• Strategic developments in Europe and Southeast Asia, alongside operational efficiencies, will drive profitability and revenue growth.
  
• BTS Group faces financial instability due to declining EBITA and margins, demand shifts in North America, and revenue volatility in Europe.

Catalysts

Operates as a professional services firm.

• The rebound in BTS Europe, driven by postponed projects progressing and cost efficiency measures, is expected to continue improving profitability and revenue growth with a strong pipeline and improved win rates. This could positively impact revenue and net margins.
  
• The acquisition of Wonderway and the integration of its AI platform, Verity, is expected to drive productivity gains, reduce contractor spend, and enhance the competitiveness of BTS's offerings, potentially increasing net margins and earnings.
  
• Continuing strong development in Southeast Asia, bolstered by the SEAC acquisition, and robust sales pipeline suggest potential for revenue growth in this region, impacting overall revenue positively.
  
• Anticipated double-digit growth in 2025 driven by more consultants generating revenue, improved client relationship practices, and increased demand for organizational change consulting, which could significantly boost revenue and earnings.
  
• Focus on operational efficiencies, including extensive use of AI for process automation and knowledge management, is expected to reduce costs and improve EBITA margins, enhancing overall profitability.

BTS Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BTS Group's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.9% today to 6.0% in 3 years time.
• Analysts expect earnings to reach SEK 226.4 million (and earnings per share of SEK 11.67) by about February 2028, down from SEK 412.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.8x on those 2028 earnings, up from 13.7x 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 5.29%, as per the Simply Wall St company report.

BTS Group Future Earnings Per Share Growth

Risks

• BTS Group experienced a decline in EBITA and margins year-over-year, with EBITA decreasing by 2% and a margin drop from 18.1% to 17%, indicating financial instability in their profitability, which may affect net margins.
  
• North America faced lower than expected demand for full-time employee-driven work, leading to a significant decline in margins due to a shift towards external contractor services, potentially reducing future earnings.
  
• The company's Other Markets segment saw negative growth of 1%, with regions such as Spain and Italy dragging down results due to client project delays, suggesting revenue instability in these regions.
  
• Economic uncertainties and corporate reorganizations in North America have led to project delays and cancellations, indicating potential volatility in revenue streams.
  
• While AI investments show promise, the financial impact remains limited, with reported gains ranging from 1% to 17% productivity increases, which may only moderately affect overall financial performance at this stage.

Valuation

• The analysts have a consensus price target of SEK345.0 for BTS 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 SEK3.7 billion, earnings will come to SEK226.4 million, and it would be trading on a PE ratio of 33.8x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of SEK291.0, the analyst price target of SEK345.0 is 15.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.