Robust European Service Demand Will Drive Operational Efficiency

Key Takeaways

• Robust demand for service business and operational efficiency improvements are expected to support revenue growth and enhance net margins in Western Europe.
  
• Strategic acquisitions and expansion efforts, including a new BMW operation, aim to increase revenue streams and long-term earnings.
  
• The company's acquisition strategy and business model shifts may risk operational inefficiencies, affecting cash flow, net debt, and profitability across segments.

Catalysts

Operates as a full-service supplier for car ownership in Sweden, Norway, Luxemburg, and Belgium.

• Robust demand for Bilia's service business in Norway and Western Europe, coupled with improved booking times, is expected to support revenue growth and enhance net margins due to higher service efficiency and solid workshop improvements.
  
• A shift towards the traditional wholesale model across various brands after trials with subscription models suggests increased stability and revenue predictability in new car sales and could positively impact earnings by maintaining dealership margins.
  
• Increased backlog of new car orders, with a 31% higher order intake compared to the previous year, indicates potential revenue growth as these orders are fulfilled, boosting future earnings.
  
• The continuous focus on operating efficiency and profitability, particularly in the service business which constitutes a significant portion of operating profit, is likely to lead to improved net margins and earnings growth.
  
• Recent acquisition of a new BMW operation and the utilization of a new bond for acquisitions and investments suggest strategic expansion efforts, potentially increasing revenue streams and long-term earnings.

Bilia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bilia's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 2.9% in 3 years time.
• Analysts expect earnings to reach SEK 1.3 billion (and earnings per share of SEK 12.45) by about May 2028, up from SEK 655.0 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 13.7x on those 2028 earnings, down from 17.2x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Bilia Future Earnings Per Share Growth

Risks

• The decreasing profitability of new cars in Sweden and Norway, attributed to lower gross profit margins and reduced bonuses from manufacturers, poses a risk to net margins and earnings in the new car segment.
  
• A potential decline in demand for fully electric used cars, alongside the longer time required to sell them, could impact revenue and reduce overall profitability within the used car market.
  
• The uncertainty and variability in the consumer index and household confidence, especially highlighted by the dip in April, introduce a risk to future revenues and earnings due to potential fluctuations in consumer spending.
  
• The company’s strategy to pursue acquisitions while emphasizing internal efficiency may stretch resources thin, thereby risking operational inefficiencies and potential strain on cash flow and net debt.
  
• The ongoing transition in business models, such as the shift from subscription models to traditional wholesales, might lead to operational adjustments that could temporarily impact revenue or incur additional costs until these strategies stabilize.

Valuation

• The analysts have a consensus price target of SEK155.0 for Bilia 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 SEK46.0 billion, earnings will come to SEK1.3 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of SEK121.7, the analyst price target of SEK155.0 is 21.5% 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.