SHOT: Room Expansion In Hamburg And Oslo Will Likely Support Balanced Outlook

Key Takeaways

• Strong booking trends and increased occupancy are expected to drive future revenue growth, supported by higher average room rates.
  
• Strategic initiatives, including digital enhancements and loyalty partnerships, aim to boost customer retention and improve operational efficiency and margins.
  
• Geopolitical tensions, rate declines, and increased costs in Finland threaten Scandic's revenue stability and profit margins, with uncertain returns on tech investments.

Catalysts

Engages in operation and franchising of hotels in Sweden, Norway, Finland, Denmark, Germany, and Poland.

• Scandic is seeing strong booking trends for the spring and summer seasons, with expectations of increased average room rates and occupancy compared to last year, supporting future revenue growth.
  
• A new hotel with 214 rooms is planned to open in Berlin in the second half of 2026, part of efforts to grow their hotel portfolio, which is expected to provide a positive impact on future revenue.
  
• Strategic initiatives such as launching a new website and app to enhance customer experience, and a partnership with SAS enabling loyalty program status matching, are expected to improve customer retention and potentially boost revenue.
  
• The implementation of the workforce management platform, Quinyx, is anticipated to enhance scheduling efficiency, likely improving operational efficiency and margins.
  
• Potential efficiency improvements in central functions over time through digitalization and cost control measures could help mitigate inflationary pressures and positively impact net margins.

Scandic Hotels Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Scandic Hotels Group's revenue will grow by 18.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 5.6% in 3 years time.
• Analysts expect earnings to reach SEK 2.1 billion (and earnings per share of SEK 7.44) by about June 2029, up from SEK 644.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK1.8 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 13.0x on those 2029 earnings, down from 29.9x today. This future PE is lower than the current PE for the GB Hospitality industry at 15.1x.
• 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 10.42%, as per the Simply Wall St company report.

Risks

• Geopolitical tensions and ongoing uncertainties in the markets could adversely impact future booking trends and revenue stability.
  
• Scandic's average room rate experiencing slight declines, especially due to adverse price developments in Finland, may pressure overall revenue.
  
• The increased capacity in Finland, particularly in Vanda, is negatively impacting occupancy rates and potentially compressing hotel room pricing, risking net margins.
  
• If cost inflation, particularly in labor or specific goods, exceeds the company's ability to increase room rates, this could squeeze profit margins over time.
  
• The anticipated costs associated with technological investments (e.g., new website, app, workforce management platform) may not yield the expected reduction in distribution costs or increased bookings, which could affect net earnings projections.

Valuation

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

• The analysts have a consensus price target of SEK93.86 for Scandic Hotels Group 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 SEK110.0, and the most bearish reporting a price target of just SEK70.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK37.4 billion, earnings will come to SEK2.1 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 10.4%.
• Given the current share price of SEK89.5, the analyst price target of SEK93.86 is 4.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.