Delayed Orders And Rising Costs Will Hamper Progress Yet Spark Hope

Key Takeaways

• Delays in customer orders and project starts, combined with heavy reliance on acquisitions, pose ongoing risks to margin improvement and organic growth.
  
• Rising compliance costs, goodwill write-downs, and slow divestments threaten net margins and earnings despite efforts to streamline and target higher-margin segments.
  
• Heavy dependence on acquisitions, uncertain organic growth, and rising costs threaten margins and earnings stability amid ongoing market and operational challenges.

Catalysts

Provides technical services for infrastructures in Sweden, the United Kingdom, Germany, Denmark, Italy, the Netherlands, Austria, Norway, Finland, the Unites States, and internationally.

• While Sdiptech stands to benefit from accelerating urbanization and the aging of critical infrastructure, persistent delays in customer order placements and project starts-driven by broader economic uncertainty-risk extending the current period of reduced organic revenue growth into future quarters.
  
• Although heightened sustainability and regulatory requirements could create enduring demand for advanced water, energy, and transport solutions, these same trends expose Sdiptech to increasing compliance and operational costs, which threaten to erode net margins even as the company targets higher-margin segments.
  
• Despite active portfolio streamlining and targeting divestments of low-margin businesses to improve return on capital employed, the necessary goodwill write-downs and the lengthy time frame required for these divestitures mean reported earnings and returns could remain under pressure for several periods before benefits are realized.
  
• While Sdiptech's disciplined acquisition strategy and expansion into digital infrastructure are structurally positive, a heavy reliance on acquisitions to fuel growth introduces ongoing risks around integration, dilutive effects, and potential for overpayment, which could cap improvements in group earnings and margins.
  
• Even as the industry's move towards digitalization and outsourcing could support long-term revenue growth, Sdiptech's exposure to slow-moving market segments and its need to catch up with larger multinationals in tech-driven offerings may require significant further investment, limiting both near-term organic growth and margin recovery.

Sdiptech Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sdiptech compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sdiptech's revenue will grow by 4.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.7% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 607.9 million (and earnings per share of SEK 15.9) by about July 2028, up from SEK 347.0 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 bearish analyst cohort, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 22.1x today. This future PE is lower than the current PE for the SE Commercial Services industry at 19.7x.
• 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 6.05%, as per the Simply Wall St company report.

Sdiptech Future Earnings Per Share Growth

Risks

• Sdiptech's reported organic sales and EBITDA have both declined year on year, and management acknowledges a lack of hard evidence supporting a near-term rebound, raising the risk that postponed customer orders may not materialize, which could put persistent downward pressure on revenues and margins.
  
• The company is highly reliant on acquisitions for growth, and with an ongoing need to divest underperforming or non-core units, there is a significant risk of integration challenges, increased goodwill impairment charges, and dilutive effects on net earnings and margins over time.
  
• Strategic divestments of lower-margin businesses will result in a one-off goodwill write-down of approximately SEK 400 to SEK 500 million, and the process is expected to take a prolonged period, potentially leading to continued earnings volatility and uncertainty in return on capital employed.
  
• Rising labor costs, particularly in major geographies like the U.K. due to new minimum wage legislation, combined with persistent cost inflation, have already contributed to margin compression, and sustained wage or input cost pressures could further erode net profit margins.
  
• Management's optimism about future demand is based more on informal customer dialogues than on solid orders, while broader market uncertainties and a wait and see environment among clients signal that the anticipated recovery in sales and earnings remains vulnerable to macroeconomic headwinds and market softness.

Valuation

• The assumed bearish price target for Sdiptech is SEK230.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sdiptech's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK365.0, and the most bearish reporting a price target of just SEK230.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK6.0 billion, earnings will come to SEK607.9 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of SEK202.0, the bearish analyst price target of SEK230.0 is 12.2% 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.