2024 Acquisitions Will Expand US Market Presence

Key Takeaways

• Geographic expansion and acquisitions aim to enhance customer base and revenue, especially in new markets and the U.S.
  
• Investments in technical capabilities and niches improve margins, while avoiding tariffs offers market share growth opportunities in North America.
  
• Macroeconomic challenges, weaker European demand, and cost pressures from imports and integration are impacting NCAB Group's revenue, profitability, and cash flow predictability.

Catalysts

Manufactures and sells printed circuit boards (PCBs) in Sweden, Nordic region, rest of Europe, North America, and Asia.

• NCAB is executing a strategy of geographic expansion through acquisitions, including significant acquisitions in 2024, which could potentially increase its customer base and revenue streams in new markets. This expanded presence and integration of acquired entities can enhance revenue growth.
  
• The ongoing investments in technical and manufacturing capabilities, along with a focus on high mix, low-volume segments, can position NCAB to improve its gross margins by leveraging economies of scale and better serving niche customer needs.
  
• The U.S. market presents a substantial growth opportunity for NCAB due to its currently lower market share in North America compared to Europe. The expansion of sales networks and capabilities there is expected to drive revenue and potentially increase earnings.
  
• Tariff changes in North America, particularly those affecting imports from China, create an opportunity for NCAB to increase market share by offering alternatives to customers seeking to avoid tariff costs. This could improve customer acquisition and revenue growth.
  
• NCAB's strategy to remain asset-light and focus on technological advancements and manufacturing partnerships could support sustainable revenue growth and potentially improve net margins through operational efficiency.

NCAB Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCAB Group's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 10.4% in 3 years time.
• Analysts expect earnings to reach SEK 488.4 million (and earnings per share of SEK 2.61) by about April 2028, up from SEK 254.9 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 30.0x on those 2028 earnings, down from 33.3x today. This future PE is greater than the current PE for the SE Electronic industry at 23.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.13%, as per the Simply Wall St company report.

NCAB Group Future Earnings Per Share Growth

Risks

• NCAB Group's revenue from Europe has been weak due to macroeconomic challenges, leading to a decrease in overall net sales by 6% for Q4, which could impact future revenue growth.
  
• The integration of recently acquired companies with lower gross margins is affecting NCAB's overall profitability, leading to a decreased EBITA margin, which may impact net margin sustainability.
  
• Ongoing market pressures in key European markets (Germany, Italy, U.K.) due to weak demand and economic indicators could continue to suppress revenue in the region.
  
• Increased tariffs on imports from China in North America may lead to increased operational costs, affecting the company's earnings if they are unable to pass on these costs to customers.
  
• Seasonal and macroeconomic factors, such as inventory adjustments and longer lead times for defense and aerospace orders, are impacting cash flow timing, affecting short-term earnings predictability.

Valuation

• The analysts have a consensus price target of SEK65.8 for NCAB Group 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 SEK4.7 billion, earnings will come to SEK488.4 million, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 6.1%.
• Given the current share price of SEK45.4, the analyst price target of SEK65.8 is 31.0% 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.