Acquisition Risks And Margin Pressures Will Gradually Ease To Support Long Term Recovery

Catalysts

About Volati

Volati is an acquisition driven group that owns and develops a portfolio of platforms across Salix, Ettiketto and Industry, with a focus on earnings and cash flow.

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

• Although Salix has reached SEK 4.0b in sales and SEK 400m in EBITA with a 10% margin, further volume recovery in DIY and professional renovation could be slower than hoped given the 25% to 30% volume loss since 2022. This may limit the pace of EBITA expansion and earnings growth.
• Although Salix targets more than 15% net revenue growth and a higher 12% EBITA margin over time, cost savings, logistics efficiencies and product mix improvements may prove harder to repeat after the recent uplift. This could cap future margin gains and affect net margins.
• While Ettiketto has added close to SEK 750m of annual turnover through Clever and Interket and is entering new European markets, these units currently operate below Ettiketto’s group margins. Integration risk remains, which could weigh on consolidated EBITA margin and short to medium term earnings.
• Although Volati has kept a steady acquisition pace of roughly SEK 750m to SEK 800m in acquired sales per year and reports a strong M&A pipeline, the time and resources needed to integrate multiple add-ons across Nordics and continental Europe may dilute management focus and limit near term organic sales growth and cash conversion.
• While preparations for a potential separate listing of Salix and a net debt to EBITDA ratio of 2.5 give balance sheet flexibility, the need to close the identified EBITA growth gap up to the SEK 1.1b to SEK 1.5b range by 2027 could encourage heavier use of debt for acquisitions. This may pressure future free cash flow and increase earnings volatility.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Volati compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Volati's revenue will grow by 7.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.8% today to 5.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 574.8 million (and earnings per share of SEK 7.23) by about April 2029, up from SEK 238.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK713.0 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2029 earnings, down from 28.3x today. This future PE is lower than the current PE for the GB Industrials industry at 26.4x.
• The bearish 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 6.53%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Salix has experienced a 25% to 30% volume loss since 2022 and management describes 2024 and 2025 as years of market bottoming and transition. A prolonged weak renovation and DIY cycle or a slower than hoped recovery in larger projects could restrict volume and make it harder to sustain 4% organic growth in sales, which would directly pressure revenue and EBITA growth.
• The group acknowledges a growth gap relative to its historic EBITA trajectory and has set an ambition to reach SEK 1.1b to SEK 1.5b of EBITA by 2027. If end markets in Industry and other platforms remain challenging for longer than expected or only recover gradually, EBITA could stay closer to the current SEK 726m level and EPS growth could fall short of analyst expectations, affecting earnings.
• Volati and Salix are explicitly targeting higher EBITA margins, including a 12% EBITA margin goal for Salix, but recent margin gains have benefited from normalized freight and exchange rates and structural cost measures that may be harder to repeat. Any reversal in input costs, logistics or mix, or slower realization of synergies in Ettiketto and Interket could limit further margin expansion and weigh on net margins and cash conversion.
• The long term model depends heavily on acquisitions, with roughly SEK 750m to SEK 800m in acquired annual sales per year and a willingness to let net debt to EBITDA temporarily rise to 3.0 to fund deals. A period of lower quality targets, integration setbacks in recent additions like Clever and Interket, or higher funding costs could reduce the value created per acquisition and strain free cash flow, putting pressure on earnings and balance sheet metrics.
• Several businesses, especially within Industry such as Corroventa and S:t Eriks, are exposed to external factors like weather driven flood activity and timing of infrastructure projects. If flood events remain infrequent or infrastructure volumes are pushed out further than implied, these platforms may continue to post weaker organic performance, which would drag on consolidated revenue, EBITA and return on equity.

Valuation

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

• The assumed bearish price target for Volati is SEK111.0, which represents up to two standard deviations below the consensus price target of SEK128.0. This valuation is based on what can be assumed as the expectations of Volati's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK145.0, and the most bearish reporting a price target of just SEK111.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK10.5 billion, earnings will come to SEK574.8 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of SEK84.9, the analyst price target of SEK111.0 is 23.5% 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.