AFRY: Strengthening Backlog And Restructuring Will Drive Recovery Momentum

Key Takeaways

• Rising global decarbonization and infrastructure trends, plus expansion in growth markets, are driving robust demand and revenue diversification for AFRY across energy and industrial sectors.
  
• Restructuring, portfolio optimization, and a focus on high-value consulting are expected to strengthen efficiency, margin quality, and recurring revenue streams.
  
• Ongoing restructuring, underutilization, market uncertainty, currency risks, and integration challenges threaten revenue growth, margins, and operational efficiency if not addressed effectively.

Catalysts

About Afry

Provides engineering, design, and advisory services for the infrastructure, industry, and energy sectors in the Nordics, North America, South America, Asia, rest of Europe, and internationally.

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

• The accelerating global push for clean energy and decarbonization is sustaining strong demand within AFRY's Energy division (e.g., high interest in nuclear, robust activity in Asia for renewables), positioning the company to benefit from a rising order backlog and top-line growth as clients continue investing despite current economic caution.
  
• Ongoing urbanization and infrastructure modernization in key markets are leading to steady transport infrastructure demand and a healthy mix of multiyear and smaller orders, providing visibility and resilience for future revenue streams.
  
• The company has undertaken large-scale restructuring and portfolio optimization, including a new group structure and significant cost reduction initiatives, which are expected to improve operational efficiency, utilization rates, and net margins over the medium term.
  
• Geographic expansion through strategic acquisitions in emerging markets, as seen with the purchase of Reta Engenharia in Brazil, is diversifying revenue away from cyclical Europe and opening new growth opportunities in critical high-demand sectors (e.g., mining/metals), supporting sustainable earnings growth.
  
• The shift towards high-value advisory and sustainability consulting, together with initiatives to improve pricing quality of the backlog, is expected to lift recurring revenue and net margins as demand for ESG and strategic consulting services increases.

Afry Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Afry's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 6.2% in 3 years time.
• Analysts expect earnings to reach SEK 1.7 billion (and earnings per share of SEK 12.73) by about August 2029, up from SEK 790.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK1.2 billion.
• 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 10.6x on those 2029 earnings, down from 14.7x today. This future PE is lower than the current PE for the GB Professional Services industry at 19.5x.
• 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 6.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent declines in utilization rates year-over-year across all divisions, coupled with ongoing restructuring and headcount reductions, may indicate excess capacity, reduced project volumes, or inefficiency-potentially putting continued downward pressure on revenues and net margins if the trend is not reversed swiftly.
  
• Ongoing restructuring initiatives (SEK 200–300 million in additional costs over the next 12 months), primarily personnel-related, highlight the risk of underutilization or market demand not matching cost structure, which could lead to elevated costs and margin compression if the anticipated payback or improved utilization does not materialize as expected.
  
• Market uncertainty and cautious client investment decisions, especially in certain industrial segments like automotive, pulp & paper, and real estate, expose AFRY to demand volatility; delayed client decisions and prolonged downturns may limit order intake growth, affecting top-line revenue and long-term earnings potential.
  
• Exposure to negative currency effects, as shown by the significant FX-related impact on net sales and EBITA this quarter, introduces ongoing financial risk, particularly given AFRY's international expansion strategy, which could further distort revenue and profit growth if unfavorable forex trends persist.
  
• Reliance on successful integration of acquisitions (e.g., Reta Engenharia) and strategic restructuring to drive growth and margins carries operational risk; missteps or delays in integrating new entities or realizing expected synergies may lead to higher costs, operational complexity, and underperformance against growth and net margin targets.

Valuation

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

• The analysts have a consensus price target of SEK132.17 for Afry 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 SEK190.0, and the most bearish reporting a price target of just SEK100.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK27.7 billion, earnings will come to SEK1.7 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of SEK102.3, the analyst price target of SEK132.17 is 22.6% 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.