Relocation To European Facilities Will Secure Future Resilience

Key Takeaways

• Strategic production shifts and merger plans aim to sustain margins and improve profitability through cost reduction and efficiency gains.
  
• Targeted growth in Security & Defense and Greentech segments indicates potential revenue increases and improved net margins.
  
• Reliance on large customers and macroeconomic pressures could risk revenue growth, while weak market segments may hinder overall performance.

Catalysts

Provides electronics manufacturing services in Sweden, Finland, the United Kingdom, Bulgaria, Estonia, China, and internationally.

• NOTE plans to move production from China to European facilities if U.S. tariffs remain, potentially maintaining revenue without losing business. This strategic shift can help sustain operating margins by avoiding tariff-related costs.
  
• Despite short-term challenges, NOTE sees opportunities for growth in the Security & Defense segment, partly due to increased demand and shorter lead times. This growth could drive future revenue increases and bolster profitability.
  
• The planned merger of UK factories from four to three aims at reducing the cost base and sustaining margins, which can improve net margins and bolster earnings in the future.
  
• NOTE is focused on streamlining operations and reducing inventory, leading to improved cash flow and potential revenue growth. Improved cash management could enhance net margins through efficiency gains.
  
• The focus on growing industrial Greentech and security markets signals potential revenue growth in segments with high growth potential, likely positively impacting overall earnings and net margins.

NOTE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOTE's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 8.1% in 3 years time.
• Analysts expect earnings to reach SEK 416.9 million (and earnings per share of SEK 13.36) by about May 2028, up from SEK 249.0 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 14.3x on those 2028 earnings, down from 18.4x today. This future PE is lower than the current PE for the GB Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 1.73% 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.

NOTE Future Earnings Per Share Growth

Risks

• Uncertainty surrounding U.S. tariffs and international trade could negatively impact sales that are connected to the U.S., potentially affecting revenue growth.
  
• The company's reliance on a few large customers, as represented by a significant portion of sales coming from the Top 25 customers, suggests potential risk in revenue concentration if any major customer reduces orders.
  
• The anticipated negative global economic outlook, including lowered growth forecasts, could have a dampening effect on NOTE's overall revenue potential.
  
• Continued challenges in certain segments like Communications and MedTech, expected to remain weak, may hinder robust revenue growth across the company’s diverse operations.
  
• Macroeconomic factors such as salary inflation in the U.K. and fluctuating currency rates could pressure net margins if cost increases are not fully offset by pricing strategies or operational efficiencies.

Valuation

• The analysts have a consensus price target of SEK185.0 for NOTE 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 SEK5.2 billion, earnings will come to SEK416.9 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK161.0, the analyst price target of SEK185.0 is 13.0% 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.