Contract Renewals Worth SEK 26 Billion Will Strengthen Revenue Stability

Key Takeaways

• High contract renewal rates and workforce restructurings in Sweden and Denmark boost revenue stability and improve operational efficiency.
  
• Simplification initiatives and financial strategies, including dividend programs and buybacks, enhance earnings and investor returns while focusing on financial health.
  
• Operational challenges and complex structure hinder profitability, with negative growth in several regions and poor cash conversion impacting liquidity.

Catalysts

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

• The company has demonstrated high retention rates, securing renewal and prolongation of contracts valued at around SEK 2.6 billion during 2024, improving stability and reducing renewal volume risks, which should positively impact future revenue growth.
  
• A focus on reorganizing their operational structure and implementing more efficient workforce planning in Sweden and Denmark is expected to bring about cost reductions and enhance operational efficiency, likely improving net margins.
  
• A simplified organization structure aimed at realizing economies of scale, coupled with a reduction of 130 positions, is projected to yield annual savings of approximately SEK 120 million, likely impacting earnings positively as these savings materialize in 2025.
  
• The proposed dividend and share buyback program, corresponding to 100% of adjusted net profit, should enhance earnings per share by reducing the number of outstanding shares, positively impacting investor returns.
  
• Actions targeting improved working capital management and leverage reduction are also underway, aiming to restore the company's financial health, which will likely have a positive impact on the company's overall earnings and margin sustainability in the long term.

Coor Service Management Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coor Service Management Holding's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 2.2% in 3 years time.
• Analysts expect earnings to reach SEK 303.6 million (and earnings per share of SEK 3.2) by about February 2028, up from SEK 126.0 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 24.5x on those 2028 earnings, down from 25.1x today. This future PE is greater than the current PE for the GB Commercial Services industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Coor Service Management Holding Future Earnings Per Share Growth

Risks

• The company is experiencing operational challenges in Sweden and Denmark, which have led to a weak adjusted EBITA margin. This indicates potential continued pressure on profit margins.
  
• The organization has a complex structure that has increased costs, which may hinder the efficient rollout of new initiatives and potentially impact net profitability.
  
• There is negative organic growth in several geographical regions, including Sweden (negative 1%), Denmark (negative 3%), Norway (negative 6%), and Finland (negative 7%), which could strain overall revenue growth.
  
• The company reported poor cash conversion at 57%, below its target of 90%, impacting its liquidity and operational flexibility.
  
• Working capital has been adversely affected by temporary and one-time effects, which could create ongoing financial strain until fully addressed.

Valuation

• The analysts have a consensus price target of SEK52.75 for Coor Service Management Holding 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 SEK13.5 billion, earnings will come to SEK303.6 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of SEK33.26, the analyst price target of SEK52.75 is 36.9% 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.