Solutions, Connectivity And Cybersecurity Will Fuel Future Success

Key Takeaways

• Improving utilization rates and margins in Solutions and Experience areas hint at potential future revenue and net margin growth.
  
• Investments in sales capacity and the high-demand cybersecurity sector could drive organic growth and bolster revenue and margins.
  
• Declining sales, competitive pressures, and cost management issues challenge Knowit's profitability and potential for revenue growth amidst a fragmented market.

Catalysts

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

• Knowit's largest business area, Solutions, continues to improve in utilization rates and margins. This trend is expected to continue and is likely to positively impact future revenue and net margins.
  
• Investments in sales capacity and a promising pipeline in the Connectivity business area may drive future organic growth, which could positively influence revenue and earnings.
  
• The group's strong position in cybersecurity and defense sectors, which show promising growth, suggests potential for increased revenue and positive margin impact as these high-demand areas expand.
  
• The stable utilization rates in the Experience business area, along with increased client interest, especially in Sweden, indicate potential for better revenue and margin performance moving forward.
  
• Efforts to optimize cost structures and increase hourly rates, despite expected salary increases, are anticipated to help improve net margins and earnings.

Knowit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowit's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 4.4% in 3 years time.
• Analysts expect earnings to reach SEK 305.8 million (and earnings per share of SEK 9.75) by about May 2028, up from SEK 83.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK267.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, down from 47.4x today. This future PE is greater than the current PE for the GB IT industry at 16.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Knowit Future Earnings Per Share Growth

Risks

• The company has experienced a notable decrease in net sales compared to the previous year, which could potentially impact its revenue and overall earnings.
  
• A 10% drop in group sales and a decrease in adjusted EBITA margin from 7.7% to 6.6% suggest ongoing financial challenges, potentially affecting profitability and net margins.
  
• Continued challenges in the telco sector have significantly impacted the Connectivity business area, putting pressure on revenues and margins.
  
• Despite improving segments, the company still faces market fragmentation and intense competition, which could hinder the ability to increase revenue and earnings.
  
• The company's effort to raise hourly rates has not kept pace with salary increases, leading to erosion in net margins and potentially affecting future profitability.

Valuation

• The analysts have a consensus price target of SEK167.0 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 SEK195.0, and the most bearish reporting a price target of just SEK145.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK7.0 billion, earnings will come to SEK305.8 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of SEK144.8, the analyst price target of SEK167.0 is 13.3% 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.