Resolving NaturVet's Challenges And Global Expansion Will Enhance Future Opportunities

Key Takeaways

• Improved growth strategy for NaturVet and global market expansion aim to enhance revenue and achieve group targets.
  
• Focus on local manufacturing and strategic innovations is set to increase market share, operational efficiency, and earnings growth.
  
• Swedencare faces challenges with sluggish organic growth, inventory build-up for new partnerships, competitive pressures, volatile revenues, and potential financial strain from M&A activities.

Catalysts

Develops, manufactures, markets, and sells animal healthcare products for cats, dogs, and horses in Sweden, the United Kingdom, Rest of Europe, North America, Asia, and internationally.

• Swedencare has identified improvement opportunities within its largest group company, NaturVet, which has experienced growth challenges. The resolution of these issues, with a strategy for private label orders and increased customer engagement, is expected to boost growth and align with group targets, likely enhancing revenue.
  
• The company is expanding its international reach, including the entry of its products into big box retailers and the launch of products in new markets beyond the U.S., such as Europe and Asia. This geographical diversification and retail presence are expected to drive revenue growth.
  
• Swedencare’s increased focus on local manufacturing across regions mitigates potential disruptions from trade tariffs and ensures steady supply chain efficiency, potentially enhancing net margins by reducing costs and improving operational efficiencies.
  
• The launch of innovative products, such as the ProDen DentalCare range, and strategic partnerships with veterinary channels and compliance solutions are projected to increase market share and foster top-line growth in the U.S. veterinary market.
  
• The company is positioned to capitalize on strategic projects initiated in 2024, while also being open to M&A opportunities that add unique features to the group. This strategic focus on innovation and acquisition is likely to boost earnings growth.

Swedencare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swedencare's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 12.0% in 3 years time.
• Analysts expect earnings to reach SEK 440.6 million (and earnings per share of SEK 2.78) by about February 2028, up from SEK 98.9 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 24.3x on those 2028 earnings, down from 72.4x today. This future PE is lower than the current PE for the SE Pharmaceuticals industry at 88.4x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.76%, as per the Simply Wall St company report.

Swedencare Future Earnings Per Share Growth

Risks

• Swedencare reported only 4% organic growth, which is below their expectations and primarily attributed to NaturVet's 21% decline, highlighting issues in their largest group company that could affect revenue and overall growth strategy.
  
• The assumption of significant inventory build-up necessary for new big box retail partnerships implies increased capital expenditure and potential cash flow constraints impacting net margins.
  
• Competitive pressures in key distribution channels, such as big-box retailers and pet specialty stores, could lead to pricing pressures and affect profit margins and earnings.
  
• The NaturVet division's reliance on large orders and substantial customers introduces volatility to revenue, highlighted by the timing effects on orders shifting into the next fiscal year, which can cause fluctuations in earnings.
  
• Potentially significant M&A activities could increase Swedencare’s debt levels, with a risk of surpassing the preferable net debt-to-EBITDA ratio, putting pressure on net margins and financial stability in the short term.

Valuation

• The analysts have a consensus price target of SEK58.667 for Swedencare 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 SEK3.7 billion, earnings will come to SEK440.6 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of SEK45.06, the analyst price target of SEK58.67 is 23.2% 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.