Westermo's Indian Expansion And R&D Investments Will Strengthen Future Prospects

Key Takeaways

• Establishment in India and product innovation by Westermo and Beijer Electronics are set to enhance Ependion's revenue growth and production efficiency.
  
• Operational efficiency and strategic product phaseouts are expected to bolster Ependion's profitability and financial resilience through higher margins and earnings.
  
• Ependion faces risks from Train segment reliance, product phaseouts, geopolitical uncertainties, and currency impacts, challenging revenue growth and profitability.

Catalysts

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

• The successful establishment of Westermo India is expected to enhance Ependion's production efficiency and local market penetration, positively impacting future revenue growth.
  
• Westermo's sustainable high gross margins, driven by supply chain improvements and operational efficiency, are likely to bolster net margins and earnings in the coming quarters.
  
• The strategic phaseout of low-margin products in Beijer Electronics should improve overall profitability, directly affecting EBIT margins and contributing to better earnings in future periods.
  
• The investment in R&D for the X3 family of products by Beijer Electronics and continued development in Westermo are expected to drive innovation and future revenue growth, while potentially increasing operating margins as new products with higher profitability are introduced.
  
• Strong free cash flow generation and reduction of working capital, particularly through inventory management, position the company for future financial resilience and potential reinvestment, positively influencing net margins and earnings.

Ependion Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ependion's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 10.4% in 3 years time.
• Analysts expect earnings to reach SEK 300.5 million (and earnings per share of SEK 10.21) by about February 2028, up from SEK 156.7 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 16.8x on those 2028 earnings, down from 22.6x today. This future PE is lower than the current PE for the SE Electronic industry at 24.7x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.19%, as per the Simply Wall St company report.

Ependion Future Earnings Per Share Growth

Risks

• Ependion's reliance on the Train segment for order intake may pose a risk if demand in the segment does not pick up as expected, potentially impacting future revenues and EBIT.
  
• The unfavorable mix within Beijer Electronics, due to the phaseout of low-margin products and high R&D expenses, could continue to strain margins and squeeze short-term earnings.
  
• Geopolitical and economic uncertainties, as mentioned by CEO Jenny Sjodahl, could impact overall market conditions and customer demand, affecting Ependion's capacity to achieve projected growth targets and revenue stability.
  
• The transition and phaseout of certain Beijer Electronics product lines may lead to temporary financial adjustments, posing risks to net margins and possibly affecting short-term earnings.
  
• Negative FX impacts and transactional variances reported in the financials indicate currency risks could continue to affect profitability and net income.

Valuation

• The analysts have a consensus price target of SEK145.0 for Ependion 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 SEK165.0, and the most bearish reporting a price target of just SEK120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK2.9 billion, earnings will come to SEK300.5 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK122.2, the analyst's price target of SEK145.0 is 15.7% 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.