On Wednesday, Goldman Sachs (NYSE:GS) revised its outlook on NKT A/S (NKT:DC), a Danish cable manufacturer, downgrading its stock from Neutral to Sell and adjusting the price target to DKK501.00 from the previous DKK548.00. The investment firm's reassessment of the company's stock follows a detailed analysis of recent business developments.
The downgrade is attributed to several factors impacting NKT A/S's financial outlook. The acquisition of SolidAl, initially considered a positive move, has been overshadowed by the costs associated with increasing the workforce for the third extrusion tower at the Karlskrona facility. These upfront employee expenses are expected to dampen the anticipated benefits from the acquisition.
Goldman Sachs also cited changing market dynamics as a reason for removing the mergers and acquisitions (M&A) premium from NKT A/S's valuation. The market for cable manufacturing has seen increased consolidation, and heightened geopolitical tensions are believed to potentially restrict non-European entities from entering the European space.
Additionally, the firm pointed to current valuations in the sector, noting that NKT A/S is trading at a forward EV/EBIT multiple of 18.8 times compared to the average of 16.2 times seen in past transactions.
Previously, NKT A/S was ranked as a top candidate for M&A in Goldman Sachs' framework, with a 30% weight given to this aspect in the price target methodology.
However, the investment firm has now shifted its valuation approach, focusing exclusively on a forward-looking sector-relative enterprise value to invested capital (EV/IC) compared to the return on invested capital (ROIC) over the weighted average cost of capital (WACC) for the next 24 months.
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