Integration Of Red Lion And PEAK-System Will Strengthen Future Market Position

Key Takeaways

• Strategic acquisitions and product launches are set to boost revenue and profitability by leveraging established market positions and new customer segments.
  
• Organizational restructuring and global supply chain integration aim to enhance efficiencies, improve margins, and support long-term growth.
  
• Declining organic growth, acquisition integration risks, and increased debt challenge HMS Networks' future revenue and profitability in key markets.

Catalysts

Engages in the provision of products that enable industrial equipment to communicate and share information worldwide.

• The acquisition of Red Lion and PEAK-System is expected to contribute significantly to the company's total growth, aiding both revenue and profitability due to their established market positions and synergies with existing divisions.
  
• The launch of new products, such as the Ewon Edge and Ewon Cloud, targets expanding customer segments, potentially increasing revenue streams in the medium to large machine builder segment.
  
• The new organizational structure, focusing on distinct divisions with customer-centric approaches, aims to enhance operational efficiencies and financial performance, positively impacting net margins and overall earnings.
  
• Reduction in destocking, particularly in regions like Japan, and stabilizing organic order intake signal an improvement in market conditions, which could lead to increased future revenues.
  
• The integration of Red Lion into the company's global supply chain is expected to result in cost efficiencies and margin improvements, supporting long-term profitability and earnings growth.

HMS Networks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HMS Networks's revenue will grow by 18.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 18.9% in 3 years time.
• Analysts expect earnings to reach SEK 957.9 million (and earnings per share of SEK 19.04) by about April 2028, up from SEK 309.7 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 42.7x on those 2028 earnings, down from 73.7x today. This future PE is lower than the current PE for the GB Communications industry at 74.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.5%, as per the Simply Wall St company report.

HMS Networks Future Earnings Per Share Growth

Risks

• The company has experienced a significant decline in organic growth, specifically a 33% drop in Q4, and the general weak market conditions, such as destocking by customers, could negatively impact future revenue growth.
  
• Despite improvements, key markets like Germany and Japan continue to face challenges, affecting order intake and limiting revenue potential in these regions.
  
• The company's reliance on acquisitions, like Red Lion and PEAK-System, for growth can pose integration risks and challenges related to achieving expected synergies, potentially impacting net margins.
  
• The debt levels have increased significantly due to recent acquisitions, leading to no dividend payout for the year. This higher leverage can strain earnings if market conditions worsen or expected synergies are not realized.
  
• Continued restructuring efforts and cost-saving measures highlight an internal focus to protect margins amid declining sales, which, if prolonged, could hinder investment in future growth opportunities, affecting long-term revenue and profitability.

Valuation

• The analysts have a consensus price target of SEK570.667 for HMS Networks 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 SEK630.0, and the most bearish reporting a price target of just SEK502.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK5.1 billion, earnings will come to SEK957.9 million, and it would be trading on a PE ratio of 42.7x, assuming you use a discount rate of 5.5%.
• Given the current share price of SEK454.8, the analyst price target of SEK570.67 is 20.3% 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.