Partnership With Scandinavian Airlines Will Strain Earnings But Improve Future Prospects

Key Takeaways

• Economic challenges in Finland and closed Russian border create uncertainty, potentially impacting future revenue negatively.
  
• Expanding with new hotels incurs high capital expenditure, straining short-term earnings and cash flow initially.
  
• Strong financial strategies and partnerships, along with operational efficiency, are set to enhance Scandic Hotels Group's revenue growth and financial stability amidst challenges.

Catalysts

Engages in operation and franchising of hotels in Sweden, Norway, Finland, Denmark, Germany, and Poland.

• The weak economic outlook in Finland and the closed border with Russia create uncertainty about when demand will recover in the region, potentially impacting future revenue negatively.
  
• The introduction of a new loyalty program and strategy may initially incur higher costs that could pressure net margins before the long-term benefits are realized.
  
• The planned expansion with new hotels in markets like Germany and Sweden represents an increase in capital expenditure that may strain short-term earnings and cash flow until these investments become profitable.
  
• The strategic commercial partnership with Scandinavian Airlines and the associated initiatives could take time to deliver expected revenue growth, which might weigh on earnings in the near term.
  
• The phased-out rent rebates in Germany and overall increased cost pressures, due to inflation and past investments, may compress near-term margins and affect earnings until efficiency gains are fully realized.

Scandic Hotels Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scandic Hotels Group's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 5.6% in 3 years time.
• Analysts expect earnings to reach SEK 1.4 billion (and earnings per share of SEK 6.48) by about February 2028, up from SEK 541.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK812.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, down from 32.2x today. This future PE is greater than the current PE for the GB Hospitality industry at 12.8x.
• 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 9.44%, as per the Simply Wall St company report.

Scandic Hotels Group Future Earnings Per Share Growth

Risks

• Scandic Hotels Group's strong financial performance, as evidenced by stable revenues and net sales growth, suggests resilience which could support share price stability. This impacts revenue and earnings positively.
  
• The company's new loyalty program and strategic partnership with Scandinavian Airlines are expected to enhance commercial capabilities and drive revenue growth. This could maintain or improve net margins by increasing customer retention and attracting new business.
  
• The expansion of the hotel portfolio with high-quality hotels in strategic locations like Germany is likely to increase the room supply and potential top-line growth. This impacts revenue and long-term earnings positively.
  
• The solid financial position with reduced net debt and initiatives for shareholder returns, including dividends and share buybacks, indicates a robust balance sheet and financial health, likely supporting earnings per share.
  
• Scandic's focus on operational efficiency, cost control, and digital investments is expected to improve profitability even amidst economic challenges, potentially strengthening net margins and overall earnings.

Valuation

• The analysts have a consensus price target of SEK69.029 for Scandic Hotels Group 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 SEK90.2, and the most bearish reporting a price target of just SEK37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK24.6 billion, earnings will come to SEK1.4 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of SEK80.15, the analyst price target of SEK69.03 is 16.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.