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Investing.com -- Interroll Group (SIX:INRN) has been upgraded to "neutral" from "sell" by UBS Global Research, with a new price target of CHF1,798, down from CHF2,040, in a note dated Friday.
The revision follows a more cautious outlook for the company, as UBS has lowered its near-term forecasts.
The adjustments reflect a slower expected organic sales growth of around 4% from FY24 to FY29, down from previous growth rates.
This slowdown is attributed to reduced capital expenditure plans from key customer industries like e-commerce, automotive, retail, and package/parcel sectors.
UBS analysts note that slower sales growth will likely limit Interroll’s ability to expand its margins, particularly in FY25 and FY26.
As a result, UBS has lowered its earnings per share estimates for FY25, FY26, and FY27 by 5%, 15%, and 8%, respectively.
Despite these adjustments, the company’s valuation remains attractive, with its price-to-earnings ratio for the next year trading at a 9% discount to its historical average.
UBS believes the stock price reflects much of the revised outlook, based on a reverse discounted cash flow valuation model.
Interroll’s sales growth is expected to align with the broader trend for Swiss small- and medium-sized enterprises but still falls short of the higher growth rates seen over the past decade.
From FY14 to FY24, the company achieved an organic sales compound annual growth rate of about 7%.
With the more cautious capex outlook and slower industry-wide growth, UBS now projects a CAGR of around 4% for FY24 to FY29, which is at the lower end of the company’s previous industry guidance of 4-7% annual growth.
On profit margins, UBS does not expect Interroll to exceed its historical peak EBIT margin of 17.7%, seen in FY20.
Instead, UBS forecasts an average EBIT margin of 15.2% for FY25 to FY29, with a peak of 15.8% in FY29.
This projection reflects the company’s limited ability to generate operating leverage due to the expected slower sales growth.
While the long-term demand for warehouse automation systems remains robust, driven by global labor shortages and rising labor costs, Interroll’s ability to capitalize on this trend is constrained by current economic conditions.
The ongoing trend of near-shoring and increasing demand for automation will continue to support the company’s business, but weaker capex in the short term will limit its growth potential.
UBS’s revised price target of CHF1,798 is based on medium-term forecasts for FY25 to FY29, with long-term assumptions for terminal growth, EBIT margin, and weighted average cost of capital at 4%, 12.7%, and 7.3%, respectively.
Despite the weaker growth outlook, the stock’s current valuation suggests that much of the revised expectations are already priced in.