Execution Of SEK 1 Billion Backlog Will Provide Future Revenue Visibility

Key Takeaways

• Robust order backlog and new contracts are expected to boost future revenue and improve net margins over time.
  
• Expansion in U.S. and Saudi markets indicates strong growth potential through higher-margin recurring revenue streams and framework agreements.
  
• Vulnerability to regulatory changes and execution delays, alongside increased debt, could negatively impact Sensys Gatso's revenue growth and financial stability.

Catalysts

Designs, develops, owns, operates, markets, and sells traffic management and enforcement solutions to nations, cities, and fleet owners worldwide.

• Sensys Gatso’s robust order book and backlog of over SEK 1 billion provides solid future revenue visibility and potential future earnings growth as the company gradually executes these contracts, contributing to increased revenue and potential improvement in net margins over time.
  
• The expected rollout of the Swedish contract in Q1 2025 and the ongoing Dutch contract, with a remaining backlog of over SEK 1 billion, suggest that there is significant future revenue yet to be recognized, which could bolster revenue and net margins as higher-margin maintenance services are phased in post-installation.
  
• Expansion in the U.S. market with 13 new TRaaS contracts indicates strong growth potential in recurring revenue streams, likely improving the stability of future revenue and potentially enhancing overall net margins due to the higher-margin nature of managed services.
  
• Sensys Gatso is entering the next phase with its Saudi customer, with new framework agreements expected to lead to orders and deliveries throughout 2025 to 2027. This progression implies future revenue growth and could contribute to sustained earnings.
  
• The successful bond issuance increases available cash for investment in working capital and fixed assets, supporting potential revenue growth through expanded operations and possibly improving future net profit margins as efficiencies are realized.

Sensys Gatso Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sensys Gatso Group's revenue will grow by 29.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach SEK 165.6 million (and earnings per share of SEK 14.38) by about January 2028, up from SEK 10.8 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 7.3x on those 2028 earnings, down from 66.9x today. This future PE is lower than the current PE for the GB Electronic industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Sensys Gatso Group Future Earnings Per Share Growth

Risks

• The unexpected legislative changes in Iowa, which resulted in a low number of approved permits for fixed speed locations, could lead to a decrease in revenue from that segment if the situation is not resolved. This highlights vulnerability to regulatory changes in key markets.
  
• The decrease in total revenue by 10% compared to the previous year, primarily due to lower System Sales, could indicate declining growth in certain business areas, ultimately affecting overall earnings.
  
• Extended customer testing phases, particularly with large projects like the Swedish contract, may delay revenue recognition and can impact near-term cash flow and financial projections.
  
• Shifts in commercial timelines in Saudi Arabia, with framework agreements taking a year longer than expected, introduce execution risk and delay anticipated contributions to revenue and profits.
  
• The net interest-bearing debt increase due to higher investments in working capital and fixed assets could impact net margins if the expected growth and profitability from these investments are not realized as planned.

Valuation

• The analysts have a consensus price target of SEK90.0 for Sensys Gatso 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 SEK1.4 billion, earnings will come to SEK165.6 million, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of SEK62.6, the analyst's price target of SEK90.0 is 30.4% 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.