Acquisitions Including BMW Dealer Will Expand Market Presence And Profitability

Key Takeaways

• Strategic acquisitions and process improvements are expected to enhance market presence and bolster revenue and earnings.
  
• Strong service business growth and efficient inventory management will improve net margins and cash flow.
  
• Declining profitability in new and used car segments, coupled with high financing costs, threatens revenue and profit margins.

Catalysts

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

• A strong and growing Service Business, with organic growth reported at 7% for the group and 17% in Norway, is expected to continue driving revenue and improving net margins through increased efficiency and profitability in workshops.
  
• Improved inventory management and a focus on reducing the stock of used cars in Sweden and Norway are expected to positively impact working capital efficiency and cash flow, helping bolster the company's financial position.
  
• Acquisitions, such as the addition of a BMW dealer in Luxembourg and increased operations for Jaguar, Land Rover, and Volkswagen, are anticipated to generate synergies and enhance revenue and earnings from expanded market presence and customer base.
  
• Strategic initiatives to improve process efficiencies and profitability across newly acquired businesses and existing operations aim to increase net margins and shareholder value over the next year.
  
• Anticipated lower interest rates, coupled with ongoing manufacturer campaigns and a favorable consumer environment, are likely to stimulate private consumer demand and drive order intake for new cars, potentially increasing revenue and supporting an earnings rebound in the Car Business.

Bilia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bilia's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 2.8% in 3 years time.
• Analysts expect earnings to reach SEK 1.3 billion (and earnings per share of SEK 13.59) by about February 2028, up from SEK 662.0 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 14.8x on those 2028 earnings, down from 20.6x 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 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Bilia Future Earnings Per Share Growth

Risks

• The decline in profitability for new cars, particularly in Sweden and Norway, due to reduced gross profit margins and fewer deliveries, could adversely affect overall earnings.
  
• The declining prices of fully electric vehicles, alongside lower profitability for used cars, point toward potential vulnerability in the Car Business segment, impacting overall net margins.
  
• A slightly high stock of used cars in Sweden and Norway poses a risk of price reductions, which could pressure revenue and profit margins.
  
• High financing costs due to elevated interest rates increase operational expenses, affecting net earnings negatively.
  
• Dependency on the Service Business for the majority of operating profit (81%) highlights potential vulnerability if there's a shift in demand, which could impact revenue stability.

Valuation

• The analysts have a consensus price target of SEK162.5 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 SEK45.0 billion, earnings will come to SEK1.3 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of SEK147.4, the analyst price target of SEK162.5 is 9.3% 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.