Expanding Manufacturing Outside China Will Improve Market Position In North America

Key Takeaways

• Strategic acquisitions and focus on high-demand industries support revenue growth and premium pricing for specialized services, enhancing market presence.
  
• Expanding manufacturing capabilities outside China and M&A integration improve margins and align with favorable geographic market trends.
  
• Weak European demand, low-margin acquisitions, working capital challenges, potential tariffs, and reliance on external partners threaten NCAB's sales, margins, and profitability.

Catalysts

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

• NCAB Group has been actively pursuing acquisitions in multiple regions, including Belgium, Switzerland, Austria, Denmark, and most significantly, DVS Global in Italy and Asia. This strategic expansion increases their local presence and customer base, potentially boosting future revenue through enhanced market penetration.
  
• The company's focus on high mix, low-volume segments with zero defects and sustainable production positions it well for growth in industries like defense, green energy, and aerospace, which are experiencing rising demand. This focus could stabilize or improve net margins by allowing NCAB to command premium pricing for specialized services.
  
• The order intake growth in regions such as Nordics and North America, supported by sectors like aerospace, defense, and commercial vehicles, suggests a potential increase in sales and market share. With a positive book-to-bill ratio of 1.09, indicating future revenue growth is expected.
  
• NCAB’s increased activity in M&A and integration of recent acquisitions, such as the implementation of new IT systems and streamlined operations, can drive operational efficiencies and potentially enhance EBITA margins over time as these integrations mature.
  
• The company's strategic focus on expanding manufacturing capabilities outside China amid changing tariffs and customer preferences may result in improved gross margins. This strategy aligns with market trends and positions NCAB to capture additional business in high-potential geographic markets like North America.

NCAB Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NCAB Group's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 10.8% in 3 years time.
• Analysts expect earnings to reach SEK 526.5 million (and earnings per share of SEK 2.81) by about February 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 29.1x on those 2028 earnings, down from 38.8x today. This future PE is greater than the current PE for the SE Electronic industry at 27.8x.
• 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 6.23%, as per the Simply Wall St company report.

NCAB Group Future Earnings Per Share Growth

Risks

• Weak demand in Europe due to macroeconomic conditions has negatively impacted revenue, particularly in key markets such as Germany, Italy, and the U.K., creating challenges in reversing declining sales. This will likely affect net sales and EBITA, especially as these regions face ongoing margin pressures.
  
• Recent acquisitions have been operating at lower gross margins compared to NCAB's historical performance, which has diluted overall margins and pressured EBITA, showing integration risks and the potential for reduced profitability.
  
• The company faces challenges in managing its working capital, particularly with the increase due to recent acquisitions. This, combined with lower operating cash flow resulting from decreased revenue, may impact liquidity and financial flexibility.
  
• The potential increase in tariffs on imports from China to North America could introduce pricing pressures and affect top-line revenue if customers seek alternative supply sources, challenging NCAB's supply chain management and customer pricing strategy.
  
• The asset-light model and reliance on external manufacturing partners outside China pose risks related to capacity constraints, especially if there is a substantial move of production away from China, potentially affecting cost structures and margins.

Valuation

• The analysts have a consensus price target of SEK68.6 for NCAB 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 SEK74.0, and the most bearish reporting a price target of just SEK61.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK4.9 billion, earnings will come to SEK526.5 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK52.9, the analyst price target of SEK68.6 is 22.9% 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.