Welotec Acquisition And X3 Launch Will Drive Future Energy Digitization

Key Takeaways

• Acquiring Welotec and investing in power grid modernization could boost Ependion's revenues and margins through strategic alignment with electrification trends.
  
• Entering India's market and launching new products like the X3 line may improve sales, profitability, and margins, aided by cost-saving measures.
  
• Economic challenges, currency impacts, and strategic investments are pressuring Ependion's margins and future financial stability amidst uncertainty.

Catalysts

Provides digital solutions for secure control, management, visualization, and data communication for industrial applications.

• The acquisition of Welotec is expected to enhance Ependion's position in the energy segment and provide access to edge computing technology, likely resulting in increased future revenues and improved EBIT margins.
  
• Significant investment in the modernization and digitalization of power grids globally, driven by megatrends like electrification and sustainability, aligns with Ependion’s strategic focus, potentially boosting sales and long-term growth.
  
• Westermo India establishment and successful entry into the Indian market may lead to increased order volumes and sales, with potential positive impacts on revenue and profitability margins.
  
• The launch of the new X3 product line by Beijer Electronics is anticipated to boost sales and improve net margins, supported by the product receiving a prestigious design award.
  
• A cost-saving program initiated within Beijer Electronics, primarily affecting staffing in the U.S. and Taiwan, is expected to reduce annual costs by SEK 22 million, enhancing net margins and contributing to improved earnings.

Ependion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ependion's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 11.7% in 3 years time.
• Analysts expect earnings to reach SEK 373.5 million (and earnings per share of SEK 10.58) by about May 2028, up from SEK 138.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the SE Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

Ependion Future Earnings Per Share Growth

Risks

• Sales declined compared to the previous year, impacting net margins and overall profitability, despite a slight increase in order intake.
  
• The financial quarter was affected by negative currency impacts and nonrecurring costs, which reduced earnings.
  
• Beijer Electronics experienced an unfavorable sales mix and final low-margin product deliveries, which weakened the net margins.
  
• The acquisition of Welotec requires significant investments and the success of a directed share issue, posing risks to financial stability and impacting future earnings.
  
• The overall economic uncertainty, including trade barriers and potential tariff impacts, could affect revenue consistency and profitability.

Valuation

• The analysts have a consensus price target of SEK144.0 for Ependion 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 SEK3.2 billion, earnings will come to SEK373.5 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of SEK115.4, the analyst price target of SEK144.0 is 19.9% 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.