STS Group (ETR:SF3): Undervalued Turnaround Play with Improving Capital Efficiency

The STS Group (ETR:SF3) has long been a laggard in its machinery sector, plagued by operational inefficiencies and persistent losses. However, recent financial results and strategic shifts suggest the company is on the cusp of a turnaround. With improving returns on capital, stabilizing revenue growth, and a projected breakeven point by 2027, STS now presents a compelling contrarian investment opportunity. Let's dissect the data to uncover why this stock could be poised for a resurgence.

Financial Turnaround: ROCE Improves, Losses Shrink

The company's most encouraging metric is its Return on Capital Employed (ROCE), which rose to 6.28% in Q1 2025, up from a recent low of -6.07% in 2019. While still below its historical peak of 8.05% in 2017, this marks a clear upward trajectory. This improvement reflects management's focus on capital discipline and operational cost-cutting.

Revenue growth, though modest at 4% annually, has accelerated in recent quarters, hitting €320 million in Q1 2025—a 11.1% year-over-year jump. Analysts had originally forecast €288.4 million for 2024, but Q1's outperformance hints at potential upside. Meanwhile, net losses have narrowed significantly: the first half of 2024 saw a loss of €0.11 per share, a 8.3% improvement over H1 2023.

Strategic Shifts and Growth Catalysts

While STS has not announced major acquisitions in recent years, its organic strategies are driving momentum:

1. Segment-Specific Strength: The Plastics segment (a key supplier to the automotive and EV markets) contributed significantly to revenue growth. With a backlog of €15.4 billion as of March 2025, this division is well-positioned to capitalize on rising demand for lightweight materials in electric vehicles.

2. Cost Optimization: General and administrative expenses, which historically consumed over 20% of revenue, have been trimmed to 21% in 2024 from 24% in 2020. This discipline is critical to achieving breakeven by 2027—or sooner.

3. Geographic Diversification: Expansions into high-growth markets like China and Brazil (via new leadership appointments in 2025) are reducing reliance on mature European markets.

Analyst Forecasts: Caution vs. Potential

Analysts remain cautious, citing risks like dividend sustainability and a delayed breakeven timeline. The consensus price target was recently lowered to €18.60, reflecting skepticism about profitability timelines. However, this pessimism may be overdone:

• Breakeven Acceleration: If STS can achieve EBITDA margins in the high single digits (as guided for 2025), breakeven could come one year earlier than projected, especially if revenue growth outperforms.
• Valuation Discount: The stock trades at just 6.5x 2025E EBITDA estimates, a steep discount to peers like Kion Group (DE:KOG) trading at 10.2x. This gap suggests the market underappreciates STS's improving fundamentals.

Investment Thesis: Buy the Dip, Target €22+ by 2026

STS Group is a classic turnaround story with asymmetric upside. Key catalysts include:
- Breakeven Achievement by 2026: Earlier than consensus, supported by margin improvements and backlog execution.
- Dividend Sustainability: While current yields are low, a profitable 2026 could reignite dividend growth, attracting income investors.
- Sector Tailwinds: EV adoption and industrial automation are fueling demand for STS's core products.

Risk Factors: Persistent losses until breakeven, supply chain disruptions, and intense competition from cheaper Asian manufacturers.

Final Recommendation

STS Group (ETR:SF3) is undervalued relative to its improving ROCE, stabilizing revenue, and the potential for breakeven acceleration. Investors with a 2–3 year horizon should consider accumulating shares at current levels. A price target of €22 by early 2026 (assuming 25% upside from current prices) aligns with conservative breakeven scenarios and valuation normalization. While risks remain, the catalysts here are too compelling to ignore.

Action Item: Buy STS Group (ETR:SF3) at current levels, with a stop-loss below €15. Monitor Q2 2025 earnings (due August 7) for further clues on margin expansion and order intake. This is a stock to hold for the rebound in European industrial equities.