Expansion In Hydropower And Digitalization Acquisitions Will Open New Opportunities

Key Takeaways

• Strong order intake and an increasing service revenue share are positioned to positively impact Andritz's revenue and net margins.
  
• Strategic acquisitions and hydropower expansion focus are set to drive future earnings growth and stability.
  
• Delays in converting order intakes to sales and unmet ESG targets risk impacting revenue, earnings, and margins across segments.

Catalysts

Provides plants, equipment, and services for pulp and paper industry, metalworking and steel industries, hydropower stations, and solid/liquid separation in the municipal and industrial sectors in Europe, North America, South America, China, Asia, and internationally.

• Andritz is experiencing strong order intake driven by Pulp & Paper and Hydropower sectors, with a significant increase in the order backlog. This is expected to impact future revenue positively as the backlog converts into sales, particularly in FY 2025.
  
• The company is seeing continuous growth in the Service business, with service revenue share reaching an all-time high of 41%. This could positively impact net margins given the typically higher margins in service-oriented business units.
  
• Strategic acquisitions, such as Procemex for digitalization and LDX Solutions for pollution control, are expected to enhance Andritz's portfolio in high-growth areas like digitalization and decarbonization, driving future earnings growth.
  
• Andritz's focus on expanding its Hydropower business, with a renewed emphasis on long-term partnerships, provides a stable outlook and could bolster both revenue and net margins in the coming years.
  
• The appointment of a seasoned CFO with experience in large cap sectors and a background in restructuring and portfolio optimization is expected to contribute to operational improvements, potentially enhancing future earnings.

Andritz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Andritz's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 6.3% in 3 years time.
• Analysts expect earnings to reach €587.3 million (and earnings per share of €5.73) by about March 2028, up from €496.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €703.1 million in earnings, and the most bearish expecting €474 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from 11.8x today. This future PE is lower than the current PE for the GB Machinery industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Andritz Future Earnings Per Share Growth

Risks

• The company experienced a slight decrease in revenue year-on-year due to not converting late order intakes into sales, which could impact future revenue if such delays persist.
  
• Infrequent large capacity adjustments, particularly in Europe, indicate structural changes necessary for operational improvement but may adversely affect earnings in the short term.
  
• The Environment & Energy segment is lagging behind in meeting ESG targets, particularly in the share of green revenues, which might impact the ESG credentials and potentially affect margins if not addressed.
  
• The devaluation effect from the integration of new investors in the Otorio joint venture resulted in a negative financial result, highlighting risks from similar restructuring endeavors affecting earnings.
  
• The need to convert the order intake backlog into sales, especially in the Pulp & Paper segment, without delays is critical, as any hindrances could impact revenue forecasting.

Valuation

• The analysts have a consensus price target of €67.25 for Andritz 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 €80.0, and the most bearish reporting a price target of just €42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.3 billion, earnings will come to €587.3 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of €60.1, the analyst price target of €67.25 is 10.6% 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.