AI And Security Focus Will Boost Stability With Strong 69% Recurring Revenues

Key Takeaways

• Transitioning to a term-based revenue model aims for stable, predictable revenue, potentially enhancing financial stability through smaller, more numerous global contracts.
  
• Focus on AI and security innovations could boost revenue by offering cutting-edge, differentiated products in telecom and IT security sectors.
  
• Reliance on telecom and large deals, alongside a shift to term-based models, constrains revenue growth despite potential gains from AI and 5G technologies.

Catalysts

Provides software products for telecom and cybersecurity industries worldwide.

• Enea is transitioning to a term-based revenue model, aiming for more stable and predictable revenue streams through signing smaller but more numerous contracts globally. This shift could improve revenue predictability and growth, enhancing long-term financial stability.
  
• The company won a significant USD 27 million network license deal, which will be recognized over the next three years. This provides a strong base for future revenue recognition and suggests potential revenue growth from similar large-scale contracts.
  
• Enea is highly focused on AI and security innovations to address growing threats and opportunities in these fields, potentially improving revenue and net margins by providing cutting-edge, differentiated products that meet market demands in telecom and IT security sectors.
  
• A strong recurring revenue base, currently accounting for 69% of total revenues, underpins Enea’s financials. This recurring revenue stream can stabilize earnings and allow for consistent free cash flow generation.
  
• Enea is actively looking at acquisition opportunities, suggesting potential for growth in revenues and market share if successful acquisitions are made to complement existing capabilities and open up new markets or customer bases.

Enea Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enea's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.8% today to 12.5% in 3 years time.
• Analysts expect earnings to reach SEK 140.5 million (and earnings per share of SEK 9.5) by about February 2028, down from SEK 143.1 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 19.5x on those 2028 earnings, up from 13.3x today. This future PE is greater than the current PE for the GB IT industry at 14.8x.
• Analysts expect the number of shares outstanding to decline by 2.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Enea Future Earnings Per Share Growth

Risks

• Enea faces significant reliance on telecom operators for its revenue, a market with constrained growth prospects (single-digit at best), which could limit Enea's revenue growth potential.
  
• The shift to a term-based revenue model and smaller deals, although potentially increasing stability through recurring revenues, might challenge immediate revenue growth and pressure profit margins.
  
• The sale of a substantial portion of OS product royalty rights in 2023 has impacted the revenue baseline for 2024, creating difficulties in demonstrating organic revenue growth.
  
• High dependency on a small number of large deals, such as the notable $27 million contract, poses a risk to revenue stability and predictability if such deals do not recur at expected levels.
  
• Enea's growth projections are closely tied to emerging technologies like AI and 5G; however, any slowdown or less-than-anticipated uptake in these technologies could adversely affect revenue and earnings forecasts.

Valuation

• The analysts have a consensus price target of SEK125.0 for Enea 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 SEK1.1 billion, earnings will come to SEK140.5 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of SEK95.3, the analyst price target of SEK125.0 is 23.8% 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.