Consolidation In Sweden Will Achieve Significant Cost Savings And Improve Efficiency

Key Takeaways

• Divestment of Elderly Care units and focus on child welfare may improve resource allocation and operational efficiency, boosting net margins and earnings.
  
• Science Based Climate Targets commitment could enhance brand reputation and attract environmentally conscious stakeholders, improving growth opportunities.
  
• The divestment, regional budget cuts, and consolidation complexities may hinder Humana's revenue growth and margins without addressing organic growth and emerging risks.

Catalysts

Provides individual and family care services for children and adults in Sweden, Finland, Norway, and Denmark.

• The divestment of the Elderly Care units and the focus on child welfare and disability services in Finland could lead to better allocation of resources and improved operational efficiency. This is likely to positively impact net margins and earnings.
  
• Integration of Team Olivia in Norway exceeded expectations in terms of business synergies, indicating potential for future margin expansion and revenue growth through enhanced operational capabilities.
  
• The consolidation of support functions in Sweden and the reduction in company structure complexity are expected to lead to significant cost savings of approximately SEK 65 million by 2026, supporting improved net margins and earnings.
  
• The strategic focus on higher-margin services, such as intensive care for child welfare and disability, may lead to an increase in revenues and improved EBIT margins in Finland over time.
  
• The company's commitment to setting Science Based Climate Targets can enhance its brand reputation and appeal to environmentally conscious stakeholders, potentially leading to increased revenues and future growth opportunities.

Humana Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Humana's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 3.6% in 3 years time.
• Analysts expect earnings to reach SEK 402.0 million (and earnings per share of SEK 7.76) by about February 2028, up from SEK 144.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, down from 13.5x today. This future PE is lower than the current PE for the GB Healthcare industry at 18.5x.
• 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 7.64%, as per the Simply Wall St company report.

Humana Future Earnings Per Share Growth

Risks

• The divestment of the Elderly Care units, particularly in Finland, means losing a portion of revenue from that segment, potentially impacting overall revenue growth.
  
• Decreased demand in Finland's open care services due to budget cuts may lead to reduced revenue and increased costs, impacting net margins negatively in the region.
  
• Continuous stagnation and client reduction in the Swedish Personal Assistance market create uncertainty in revenue growth and margin recovery.
  
• Complexity from consolidating 180 companies into around 50 could result in unforeseen costs or disruptions, potentially affecting overall earnings.
  
• The current organic growth rate is lower than desired, which may hinder future revenue growth if not addressed adequately.

Valuation

• The analysts have a consensus price target of SEK48.333 for Humana 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 SEK11.2 billion, earnings will come to SEK402.0 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of SEK37.55, the analyst price target of SEK48.33 is 22.3% 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.