Acquisitions And High Demand In Defense, Energy, And Cybersecurity Will Strengthen Future Market Position

Key Takeaways

• Successful acquisitions in Finland and Denmark enhance market presence, indicating potential for increased revenue and profitability through growth initiatives.
  
• High demand in defense, energy, and cybersecurity sectors presents revenue growth opportunities, suggesting potential for improved net margins and earnings.
  
• Reduced organic growth and high competition risk inconsistent revenue generation and pressure on margins, while acquisition costs strain financials amidst weak market performance in Finland and Sweden.

Catalysts

Provides technical consultancy services in Sweden and internationally.

• Prevas has made significant acquisitions in Finland and Denmark, with successful integration indicating potential for increased revenue and profitability. This is expected to enhance their market presence and drive future revenue growth.
  
• The company is focused on increasing its turnover by 10% annually, combining organic and acquired growth, and aims to achieve an average EBITA of 12%. This strategic goal suggests future growth in both revenue and earnings.
  
• Positive developments in Finland, such as securing new significant orders and reducing temporary layoffs, signal a potential turnaround and contribution to a stronger EBITA. This indicates an expected improvement in profitability and earnings in 2025.
  
• Prevas is capitalizing on high demand in defense, energy, and cybersecurity sectors, indicating a revenue growth opportunity. The ability to adapt to market demands demonstrates potential for increased revenue and improved net margins.
  
• Strong operational cash flow and a 29% increase in cash flow from operating activities in Q4 create a solid financial platform to support future growth initiatives, potentially leading to higher earnings and stable net margins.

Prevas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prevas's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 8.1% in 3 years time.
• Analysts expect earnings to reach SEK 152.0 million (and earnings per share of SEK 11.85) by about March 2028, up from SEK 91.4 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 13.9x on those 2028 earnings, down from 14.7x today. This future PE is lower than the current PE for the SE IT industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Prevas Future Earnings Per Share Growth

Risks

• The reduced organic growth in Q4 suggests that Prevas is not achieving its desired growth without acquisitions, which could lead to inconsistent revenue generation going forward.
  
• A lower utilization rate compared to the previous year indicates inefficiencies in resource use, potentially leading to increased operational costs and decreased net margins.
  
• The pressure from high competition in certain consultancy areas, like IT, could limit Prevas's ability to secure profitable projects, impacting overall earnings.
  
• Costs associated with acquisitions, such as the SEK 25 million in acquisition-related expenses for 2024, could strain financial resources and affect net margins negatively if not offset by increased revenues.
  
• The persistence of a weak market in Finland and only flat development in the Swedish market could delay expected profit recovery, particularly affecting earnings and revenue targets.

Valuation

• The analysts have a consensus price target of SEK133.0 for Prevas 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 SEK1.9 billion, earnings will come to SEK152.0 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.9%.
• Given the current share price of SEK104.2, the analyst price target of SEK133.0 is 21.7% 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.