Reorganization Into Five Divisions Will Improve Operational Efficiency

Key Takeaways

• Consistent M&A strategy and proprietary product focus are key drivers of enhanced revenue growth and profitability.
  
• Strategic reorganization and international expansion aim to boost operational efficiency, diversify growth, and improve financial performance.
  
• Over-reliance on acquisitive growth poses integration risks, affecting long-term profitability amid economic challenges and sluggish construction sector impacting organic growth.

Catalysts

Operates as a technology company in Sweden, Denmark, Norway, Finland, Germany, the United Kingdom, Benelux, Poland, rest of Europe, North America, Asia, and internationally.

• Lagercrantz Group's consistent M&A strategy, aiming to acquire 8-12 companies per year, is expected to significantly boost revenue growth, with ambitions to increase the group’s size by approximately 10% annually.
  
• The company's focus on driving proprietary products, with a target to increase their share to 85% of operations, is likely to enhance net margins as these products typically offer higher profitability.
  
• Structural growth within the Electrify and Niche Products divisions, particularly driven by trends in electrification and niche market opportunities, is expected to sustain and potentially enhance revenue and margin performance.
  
• A strategic reorganization into five focused divisions is yielding promising results, improving both operational efficiency and financials, as evidenced by increased revenues and a stable, slightly improving EBITA margin.
  
• Continued international expansion, notably through increasing acquisitions outside the Nordics, is expected to diversify growth sources and drive earnings as new markets are tapped, particularly in sectors and regions with underlying growth trends.

Lagercrantz Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lagercrantz Group's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.8% in 3 years time.
• Analysts expect earnings to reach SEK 1.6 billion (and earnings per share of SEK 7.42) by about March 2028, up from SEK 953.0 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 37.9x on those 2028 earnings, down from 48.6x today. This future PE is greater than the current PE for the GB Electronic industry at 25.7x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Lagercrantz Group Future Earnings Per Share Growth

Risks

• Ongoing sluggishness in the construction sector, particularly impacting divisions like Control and TecSec, could continue to hinder organic growth and affect revenue and earnings stability.
  
• Economic challenges in key markets like Germany and Finland may dampen export performance and limit potential growth in those regions, impacting overall revenue growth.
  
• The heavier reliance on acquisitive growth, with 2/3 of growth targeted through acquisitions, could lead to integration risks and pressure margins if successful integration isn't achieved, potentially affecting long-term profitability and earnings.
  
• Inflation and potential changes in interest rates could impact the cost of acquisitions and operational costs, affecting net margins and bottom-line profits.
  
• Variability in book-to-bill ratios and concerns about sustained order intake, particularly in construction-related businesses, might undermine future revenue consistency and growth expectations.

Valuation

• The analysts have a consensus price target of SEK242.25 for Lagercrantz Group 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 SEK275.0, and the most bearish reporting a price target of just SEK225.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK12.3 billion, earnings will come to SEK1.6 billion, and it would be trading on a PE ratio of 37.9x, assuming you use a discount rate of 6.1%.
• Given the current share price of SEK224.6, the analyst price target of SEK242.25 is 7.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.