Shift Towards AI-Based Services Will Attract Future Clients

Key Takeaways

• AI-based offerings and expanded sales capacity could drive growth through innovative service delivery and a broadened client portfolio.
  
• Market recovery and cost restructuring may enhance margins and earnings, especially in stable and improving Nordic markets.
  
• Challenges in digital services and market uncertainties risk future revenue, despite cost-cutting measures like workforce reduction impacting profitability and potential operating capacity.

Catalysts

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

• Knowit’s Solutions business area has shown a continued positive trend in utilization and improved margins, which indicates potential for revenue growth and improved earnings as the market recovers.
  
• Cost reductions and organizational restructuring in the digital agency Experience and management consultancy Insight sectors may improve net margins in the future once market conditions stabilize and demand returns.
  
• Investment in sales capacity within the Connectivity business unit has successfully expanded Knowit’s client portfolio, which is likely to drive future revenue growth.
  
• The focus on transforming business areas towards AI-based offerings could increase demand for Knowit’s services, potentially leading to increased revenues and enhanced earnings through innovative service delivery.
  
• Signs of improved market demand, particularly from industries like defense and retail, suggest potential for future revenue expansion as these sectors grow, especially in stable markets like Norway and improving ones like Finland and Sweden.

Knowit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowit's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.4% in 3 years time.
• Analysts expect earnings to reach SEK 306.9 million (and earnings per share of SEK 11.23) by about April 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 18.9x on those 2028 earnings, down from 37.4x today. This future PE is greater than the current PE for the GB IT industry at 14.6x.
• 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 7.01%, as per the Simply Wall St company report.

Knowit Future Earnings Per Share Growth

Risks

• The company is experiencing challenges in its digital agency Experience and management consultancy Insight, leading to ongoing downsizing and cost reductions, which negatively impact profitability and could reduce future revenue potential.
  
• There is a decrease in overall sales by approximately 10%, with some business areas, such as Connectivity, showing declining margins, reflecting the challenging market conditions and potential pressure on future earnings.
  
• The company had to reduce its workforce by over 10%, which, while a cost-saving measure, also indicates potential limitations in operating capacity that might impact revenue generation and net margins.
  
• An ongoing weak market particularly in Finland and Denmark, coupled with economic uncertainties in Sweden, poses continued risk to revenue growth and margin stability.
  
• The decreasing demand in the telecom sector due to a major client's reduced demand could adversely affect revenue streams, counteracting other areas of growth.

Valuation

• The analysts have a consensus price target of SEK175.0 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 SEK205.0, 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 SEK306.9 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of SEK145.0, the analyst price target of SEK175.0 is 17.1% 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.