KNOW: Recent Public Sector Wins Will Drive Long-Term Digital Expansion

Key Takeaways

• Expansion into high-growth sectors and increased focus on advanced digital solutions position Knowit for stronger revenue growth, margin improvement, and higher-value contracts.
  
• Optimization of internal efficiency and disciplined pricing support profitability, while investments in key competencies and talent foster long-term growth and stability.
  
• Margin pressures, efficiency issues, restructuring, technological shifts, and client concentration threaten revenue growth, profitability, and stability, highlighting high operational and strategic risks.

Catalysts

Operates as a consultancy company in Sweden and internationally.

• Knowit's expansion into high-growth sectors such as defense and fintech through recent targeted acquisitions positions the company to capitalize on increased digitalization and regulatory requirements in these industries, likely supporting faster revenue growth and margin improvement as these segments scale.
  
• Rising demand for data, analytics, and AI-driven solutions is enabling Knowit to move up the value chain and secure more strategic assignments, which is expected to enhance both topline growth and net margins as the company captures higher-value contracts and advisory work.
  
• Persistent efforts to optimize internal utilization rates, even in a tough market, create significant latent earnings leverage; a market recovery or stabilization could enable Knowit to rapidly improve earnings and margins as existing capacity is more fully utilized.
  
• Knowit's consistent focus on maintaining pricing discipline-avoiding price cuts to drive volume-should preserve underlying profitability, allowing for stronger net margin expansion when salary inflation stabilizes and demand picks up.
  
• Continued investment in key competencies (e.g., cyber, data, ERP, cloud) and selective recruitment in growth areas strengthens Knowit's ability to address the ongoing digital transformation needs of clients, supporting long-term recurring revenue growth and operational stability.

Knowit Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Knowit's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.9% today to 3.9% in 3 years time.
• Analysts expect earnings to reach SEK 238.0 million (and earnings per share of SEK 8.35) by about April 2029, up from -SEK 284.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.7x on those 2029 earnings, up from -7.6x today. This future PE is greater than the current PE for the GB IT industry at 16.7x.
• 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 8.21%, as per the Simply Wall St company report.

Risks

• Persistent price pressures across most business areas, combined with the inability to consistently offset salary inflation with price increases, are compressing EBITA margins and pose a risk to both revenue growth and net profitability if these trends continue or worsen.
  
• Ongoing underutilization of staff, with utilization rates still below historic norms even after a year of improvement initiatives, suggests structural efficiency challenges-limiting operating leverage, harming earnings growth, and raising the risk of sustained EBITA margin dilution if market recovery remains slow.
  
• Intense competition, volume pressure, and problematic customer mixes in certain country segments (notably Denmark and Finland) have resulted in service line restructuring, divestments, and headcount reduction, potentially constraining revenue growth and exposing the company to market share loss in key Nordic segments.
  
• The automation and AI-driven shift, particularly visible in Experience (e.g., reduced personnel needs for low-end coding), could further erode demand for traditional consulting work, threatening topline revenue and requiring ongoing and potentially costly upskilling to avoid project delivery gaps and talent attrition.
  
• Reliance on cyclical client sectors (e.g., telco, public sector) and exposure to delayed investment decisions or budget constraints-along with heavy concentration in specific clients or segments-could create instability in revenue streams and earnings, with little progress towards diversifying sources of recurring income (notably from SaaS or platform-based services).

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SEK121.67 for Knowit 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 SEK140.0, and the most bearish reporting a price target of just SEK95.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK6.1 billion, earnings will come to SEK238.0 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 8.2%.
• Given the current share price of SEK79.2, the analyst price target of SEK121.67 is 34.9% 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.