Subscription Expansion And EyeView Rollout Will Strengthen Future Prospects

Key Takeaways

• Expansion of lifestyle subscriptions and store openings aims to drive revenue growth and market penetration, particularly in Scandinavian regions.
  
• Cost-saving efforts and new business ventures, like Synsam Hearing, are expected to improve margins and diversify revenue streams.
  
• Economic uncertainty and high expenditures challenge Synsam's revenue growth and margins, while cautious consumer behavior and rollout costs pose long-term financial risks.

Catalysts

Operates as an optical retailer in the Nordic Region.

• Synsam's lifestyle subscription business, which provides a stickier customer base, currently constitutes 53% of total sales and has significant room for further penetration in the Scandinavian market. This is expected to drive future revenue growth as the service expands.
  
• The rollout and integration of Synsam EyeView, with plans for full completion in Sweden and Norway by the end of 2025, aims to increase capacity and enhance customer satisfaction. The reduction in training and implementation costs post-2025 should positively impact net margins.
  
• Synsam plans to open 90 new stores between 2024 and 2026, focusing on smaller towns, which could lead to lower operating costs and broaden market reach. This expansion is expected to contribute to revenue growth while maintaining operational efficiency.
  
• The ongoing cost-saving programs intended to balance out cost increases offer a potential improvement in operating expenses, which if successful, could lead to better net margins and enhanced earnings.
  
• Synsam's exploration of Synsam Hearing as a new business line, leveraging synergies between optical and hearing solutions, could diversify revenue streams and potentially improve overall gross margins.

Synsam Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synsam's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach SEK 917.0 million (and earnings per share of SEK 6.26) by about February 2028, up from SEK 366.0 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 12.7x on those 2028 earnings, down from 19.0x today. This future PE is lower than the current PE for the SE Specialty Retail industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Synsam Future Earnings Per Share Growth

Risks

• The consumer environment remains uncertain with cautious consumer behavior, which could impact revenue growth and margins if this trend continues or worsens.
  
• Although Synsam has cost-saving programs in place, the potential for a worse economic environment could strain net margins if consumer optimism does not improve as anticipated.
  
• The Synsam EyeView rollout is still in progress, incurring double costs and ongoing expenses, which can impact net margins until implementation and training are fully completed. Sustained infrastructure and license costs also pose long-term financial considerations.
  
• Growth through new store openings may slow after 2024, potentially affecting the pace of revenue expansion compared to prior years if consumer demand does not align with increased retail presence.
  
• Inventory levels and capital expenditures remain high, driven by new assortments and store upgrades, which could strain cash flow and net earnings if not managed effectively or if anticipated sales growth does not materialize as expected.

Valuation

• The analysts have a consensus price target of SEK66.333 for Synsam based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK75.0, and the most bearish reporting a price target of just SEK59.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK7.9 billion, earnings will come to SEK917.0 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of SEK47.5, the analyst price target of SEK66.33 is 28.4% 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.