Efficiencies And Reinvestment Will Unlock Nordic Opportunities

Key Takeaways

• Strategic investments in high-margin services and optimized portfolio are expected to enhance earnings and profitability while reducing net debt.
  
• Improved financial flexibility through strong cash flow and debt reduction supports growth investments, boosting future earnings and shareholder value.
  
• Brand reputation risks and regional challenges, like declining Finnish revenues and rising Norwegian costs, might impact growth if negative trends persist.

Catalysts

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

• Humana is focusing on increasing cost efficiencies, synergies, and legal consolidation, with effects expected to fully materialize by the end of next year. This initiative is likely to improve net margins and overall profitability.
  
• The company is investing in specialized child welfare and disability services, particularly in Finland and Sweden, which offer higher-margin opportunities. This strategic focus is expected to boost future revenues and profitability.
  
• The sale of the Elderly Care units in Finland and the targeted reinvestment in higher-margin areas signal an optimized portfolio, expected to enhance earnings and reduce net debt.
  
• Strong cash flow and the reduction of net debt to a leverage ratio of 2.6x improve financial flexibility for growth investments, potentially increasing future earnings and shareholder value.
  
• The stabilization and potential growth in Personal Assistance volumes and customer inflows, coupled with a focus on new customer acquisition, indicate potential revenue stability and growth in this segment.

Humana Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Humana's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 3.8% in 3 years time.
• Analysts expect earnings to reach SEK 424.5 million (and earnings per share of SEK 7.62) by about May 2028, up from SEK 197.0 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 8.7x on those 2028 earnings, down from 10.4x today. This future PE is lower than the current PE for the GB Healthcare industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 5.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Humana Future Earnings Per Share Growth

Risks

• The divestment of the Finnish Elderly Care business and decreased demand in some Finnish regions could lead to a reduction in revenues, as Finland is in a transition period and may face challenges finding growth opportunities.
  
• There was a decline in Personal Assistance profitability and a net outflow of customers, impacting revenue stability and potentially affecting adjusted EBIT margins if this trend continues.
  
• Increased personnel costs in Norway, even though somewhat compensated by price increases and organic growth, might pressure net margins if costs continue to rise.
  
• Media reports and concerns about criminal connections within Personal Assistance could damage brand reputation and lead to reduced customer inflow, affecting revenue and future growth prospects.
  
• Political debates and slow client inflows for HVB units due to perceived social issues and fears from municipalities could lead to revenue challenges if these trends persist amidst the broader societal narrative.

Valuation

• The analysts have a consensus price target of SEK50.0 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 SEK11.1 billion, earnings will come to SEK424.5 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of SEK40.85, the analyst price target of SEK50.0 is 18.3% 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.