AI Transformation And Improving Swedish Markets Will Create Future Opportunities

Key Takeaways

• Continued improvement in Solutions utilization and margins suggests potential for increased revenue and profitability.
  
• AI-based delivery transformation, especially in defense and cybersecurity, offers opportunities for new business models and revenue growth.
  
• Weak markets and cost reductions at Knowit harm profitability and margins, with risks from economic slowdown and decreased demand affecting future earnings growth.

Catalysts

A consultancy company, engages in the development of digital solutions.

• The Solutions business area, which accounts for more than 50% of Knowit's revenue, has shown a continued improving trend in utilization and margin enhancements for several consecutive quarters. This indicates the potential for higher revenue and improved profitability as these improvements are sustained.
  
• Signs of market improvement in Sweden, particularly in sectors like retail and potential larger public sector budgets are emerging. This could drive future revenue growth for Knowit as these sectors strengthen.
  
• The company is focusing on enhancing sales activities and cost optimization, which are essential for improving net margins and overall earnings.
  
• Investment in sales capacity and improving client portfolio in the Connectivity area are likely to lead to increased revenue and potential earnings growth in the future.
  
• The transformation towards more AI-based delivery, particularly in areas such as defense and cybersecurity, presents an opportunity to leverage new business models and drive revenue growth as AI projects expand.

Knowit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowit's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 6.0% in 3 years time.
• Analysts expect earnings to reach SEK 418.7 million (and earnings per share of SEK 15.31) by about February 2028, up from SEK 106.1 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 10.6x on those 2028 earnings, down from 35.1x today. This future PE is lower than the current PE for the GB IT industry at 14.7x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Knowit Future Earnings Per Share Growth

Risks

• The digital agency Experience and management consultancy Insight are experiencing weak markets, resulting in downsizing and cost reductions, which has negatively impacted profitability and margins. This could continue to pressure future earnings.
  
• Sales have decreased by 10% in the fourth quarter and 9.6% for the full year due to declining market demand and reduction in capacity, which affects revenue growth projections.
  
• High competition and a challenging market environment have led to a decrease in adjusted EBITA and margins compared to the previous year, indicating lower net profits.
  
• There is a potential risk linked to the economic slowdown, where further reductions in demand (as seen in telecom due to a significant client) could negatively affect revenue.
  
• Cost-cutting measures, including a reduction of more than 400 employees, could impact Knowit's ability to capture growth opportunities and affect future earnings growth, especially if market conditions do not improve as expected.

Valuation

• The analysts have a consensus price target of SEK136.0 for Knowit 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 SEK151.0, and the most bearish reporting a price target of just SEK125.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK6.9 billion, earnings will come to SEK418.7 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of SEK136.0, the analyst price target of SEK136.0 is 0.0% different. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.