Contract Renewals With PostNord And Cost Savings Will Improve Future Efficiency

Key Takeaways

• Large contract renewals and new contracts strengthen future revenue growth and support organic growth with a high contract retention rate.
  
• Organizational restructuring and workforce planning initiatives aim to reduce costs, enhance operational efficiency, and improve net margins and shareholder returns.
  
• Operational and financial challenges, including higher personnel expenses and missed targets, negatively impact Coor's profitability and dampen revenue growth across its key regions.

Catalysts

Provides facility management services in Sweden, Norway, Denmark, and Finland.

• Coor Service Management has secured several large contract renewals and new contracts, providing a strong foundation for future revenue growth. This includes significant extensions with PostNord and Borealis and new contracts like Telenor Tower. [Revenue]
  
• The company is implementing a simplified and unified organizational structure aimed at reducing costs and enhancing operational efficiency. This initiative includes reducing personnel costs, which is expected to lead to a full-year saving of approximately SEK 120 million, thereby improving net margins. [Net Margins]
  
• Coor's high contract retention rate of 88%, a significant improvement compared to the previous three-year average of 67%, provides a stable revenue stream and supports organic growth prospects. [Revenue]
  
• A focus on improving workforce planning and resource efficiency, particularly in Sweden and Denmark, is anticipated to strengthen operational efficiency and profitability. Improvements are expected to be reflected in future financial reports. [Earnings]
  
• The company's planned share buyback program, alongside a proposed dividend, aims to improve EPS and total shareholder returns. The proposed buyback represents approximately 1.5% of outstanding shares, suggesting a commitment to enhancing shareholder value. [Earnings Per Share]

Coor Service Management Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coor Service Management Holding's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 3.1% in 3 years time.
• Analysts expect earnings to reach SEK 411.8 million (and earnings per share of SEK 4.48) by about March 2028, up from SEK 126.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK353.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 25.2x today. This future PE is lower than the current PE for the GB Commercial Services industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Coor Service Management Holding Future Earnings Per Share Growth

Risks

• The adjusted EBITA margin for Q4 was 3.3%, below last year and their internal target. This indicates operational challenges in Sweden and Denmark, which can negatively impact overall profitability.
  
• Organic growth showed a negative trajectory in several regions: negative 1% in Sweden, negative 3% in Denmark, negative 6% in Norway, and negative 7% in Finland. This can impact revenue growth negatively.
  
• Personnel expenses have increased, particularly within cleaning and security services, which affects operating margins and net profit.
  
• Leverage has increased to 3, and cash conversion is below target at 57%, demonstrating financial strain that can affect net income and subsequently influence dividend payouts.
  
• The action program's harmonization efforts have not fully met targets, leading to increased administrative costs, which impacts net margins and profitability.

Valuation

• The analysts have a consensus price target of SEK49.5 for Coor Service Management Holding 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 SEK57.5, and the most bearish reporting a price target of just SEK43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK13.5 billion, earnings will come to SEK411.8 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of SEK33.52, the analyst price target of SEK49.5 is 32.3% 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.