Structural Growth And M&A Model Will Support Stronger Future Earnings Power

Catalysts

About Green Landscaping Group

Green Landscaping Group provides ground maintenance and landscaping services for public and private customers across several European markets.

What are the underlying business or industry changes driving this perspective?

• The company operates in a large European ground maintenance and landscaping market that management describes as having structural growth, which can support a higher and more durable revenue base over time.
• A decentralized, entrepreneurial operating model keeps decision making close to customers. This can support better pricing, tighter cost control and, over time, higher EBITA margins at the local company level.
• A proven M&A approach, with 60 companies already in the group and continued activity such as the acquisition of Finke in Germany, can expand the revenue pool and, if integrated well, support EBITA growth.
• Growing exposure to Other Europe, where rolling 12 month net sales are SEK 1.5b and EBITA margin is 18.2%, can gradually lift the group mix toward regions with higher profitability and support group earnings.
• Management focus on working capital, cash generation and reducing financial leverage from 3.1, together with refinancing that lowered funding costs, can support future cash flow and net earnings.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Green Landscaping Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Green Landscaping Group's revenue will grow by 6.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.0% today to 3.8% in 3 years time.
• The bullish analysts expect earnings to reach SEK 290.7 million (and earnings per share of SEK 5.13) by about July 2029, up from SEK 127.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK234.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.6x on those 2029 earnings, down from 11.7x today. This future PE is lower than the current PE for the SE Commercial Services industry at 19.5x.
• The bullish analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent underperformance in Norway, where rolling 12 month EBITA margin is 3.4% with a 60% decline in profitability and a Q1 margin of 3.2% loss despite 5% revenue growth, suggests that execution issues on long term municipal contracts could prove harder to fix than management expects. This would weigh on group EBITA margins and earnings.
• The Norwegian market is described as tough, with high interest rates, cost inflation and lower supply of new work leading to heavy competition. If this weaker demand environment lasts for several years it could pressure pricing on new contracts and renewals, hindering revenue growth and compressing net margins.
• Financial leverage of 3.1x on SEK 2.5b of net debt, combined with free cash flow of SEK 15 million loss in Q1 and rolling 12 month operating cash flow of SEK 340 million, leaves limited room for error if working capital issues continue. This could constrain acquisition led growth and put pressure on net earnings through higher net interest costs.
• Working capital has tied up SEK 170 million on a rolling 12 month basis and receivables have been a key drag. If customers continue to pay more slowly in a weaker market or local housekeeping actions fall short, cash conversion could remain under strain, limiting the company’s ability to reinvest, reduce debt and support earnings growth.
• The growth model relies heavily on acquiring and integrating many relatively small companies, with 60 already in the group and new additions such as Finke in Germany. If tougher financing conditions or internal capacity constraints slow the pace or quality of these deals over several years, the contribution to revenue growth and EBITA expansion could be lower than bullish expectations.

Valuation

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

• The assumed bullish price target for Green Landscaping Group is SEK36.0, which represents up to two standard deviations above the consensus price target of SEK35.0. This valuation is based on what can be assumed as the expectations of Green Landscaping Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK7.7 billion, earnings will come to SEK290.7 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of SEK26.4, the analyst price target of SEK36.0 is 26.7% 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.