Seventh-Generation CORBOX Will Provide Advanced AI And Cybersecurity Features

Key Takeaways

• Investments in AI and automation aim to enhance efficiency and net margins, leveraging technology to lower personnel costs.
  
• Launch of CORBOX generation emphasizes AI and multi-cloud, boosting revenue through cross-selling and upselling opportunities.
  
• Strategic cost management and reliance on bundled procurement challenge cash flow stability and near-term profitability, risking misleading perceptions of stable growth.

Catalysts

Provides information technology (IT) solutions in Germany and internationally.

• DATAGROUP's ongoing investment in AI and automation technologies is expected to enhance productivity and operational efficiency, potentially improving net margins as the company leverages automation to reduce personnel costs.
  
• The launch of the seventh generation of CORBOX, with features emphasizing AI, cybersecurity, and multi-cloud capabilities, is anticipated to drive further revenue growth through cross-selling and upselling opportunities with existing customers and new acquisitions.
  
• Inorganic growth through strategic acquisitions, such as TARADOR, supports expansion into the SME segment, potentially increasing revenue by broadening the customer base and IT service offerings.
  
• The company's long-term contracts and successful order entries are expected to contribute to stable future revenue streams, with new customer contracts likely impacting revenue positively over the next fiscal years (e.g., '25/'26).
  
• The focus on innovative service offerings, such as core compliance services that automate regulatory compliance, is likely to attract new customers and retain existing ones, thus influencing both revenue growth and maintaining or increasing net margins by offering differentiated, value-added services.

DATAGROUP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DATAGROUP's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 6.6% in 3 years time.
• Analysts expect earnings to reach €43.5 million (and earnings per share of €5.2) by about September 2028, up from €24.4 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 15.8x on those 2028 earnings, down from 20.8x today. This future PE is lower than the current PE for the DE IT industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

DATAGROUP Future Earnings Per Share Growth

Risks

• The cash flow is impacted negatively due to significant upfront costs, such as the procurement of hardware and software licenses, which will only yield revenues over an extended period. This mismatch can strain cashflow and delay profit realization. (Impacts cash flow and net margins)
  
• There is a defensive approach to cost allocation during customer transitions, accepting lower margins in the short term to manage transition costs and future profitability, which may indicate current margin compression. (Impacts net margins)
  
• The company's growth strategy includes significant transition costs and acquisitions, which can lead to higher operational costs and potential inefficiencies in the short term, affecting profitability. (Impacts earnings and net margins)
  
• The effect of special one-off revenue in Q1 diminishes the appearance of stable growth in service revenue, potentially misleading stakeholders about the company's underlying performance. (Impacts revenue and net margins)
  
• The company's dependency on bundling hardware and software procurement to secure favorable pricing introduces irregular cash outflows, further complicating cash flow and financial planning. (Impacts cash flow and potentially future net earnings)

Valuation

• The analysts have a consensus price target of €69.5 for DATAGROUP 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 €86.0, and the most bearish reporting a price target of just €54.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €655.2 million, earnings will come to €43.5 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of €60.9, the analyst price target of €69.5 is 12.4% 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.