Pulp And Hydropower Order Backlog Will Drive Future Markets

Key Takeaways

• Strategic acquisitions and restructuring efforts are set to enhance growth, expand market presence, and improve profitability across key segments.
  
• Increased order intake and a robust order backlog promise stable revenue growth and margin stability, bolstered by the service business' strong performance.
  
• Sales decline and interest rate reliance could threaten revenue stability and profitability, with cash flow challenges impacting financial health.

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.

• The significant increase in order intake, particularly in the Pulp & Paper and Hydropower segments, is expected to provide a stable cushion for future growth, potentially driving revenue increases.
  
• The continued growth in the Service business, reaching an all-time high of 44% revenue contribution, is likely to stabilize financial performance and support gross margins.
  
• Successful capacity reduction and restructuring efforts in the Metals and Pulp & Paper segments are intended to protect margins and improve overall profitability, impacting net margins positively.
  
• Strategic acquisitions like LDX Solutions and A.Celli Paper are expected to enhance growth potential and expand market presence, particularly in high-growth areas of Clean Air and tissue paper production, likely contributing positively to future revenues and earnings.
  
• A solid order backlog of €10.2 billion, primarily driven by Pulp & Paper and Hydropower areas, ensures a stable revenue outlook and EBITA margin stability, fostering earnings predictability.

Andritz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Andritz's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 6.9% in 3 years time.
• Analysts expect earnings to reach €663.9 million (and earnings per share of €6.22) by about July 2028, up from €481.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €581.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 13.6x today. This future PE is lower than the current PE for the GB Machinery industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 1.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Andritz Future Earnings Per Share Growth

Risks

• Revenue decreased by 7% to €1.8 billion, which could indicate potential challenges in maintaining sales growth and impacting overall revenues.
  
• A decline in the net income margin, due to factors described as seasonal impacts and sales decline, could signify potential issues with profitability that affect net margins.
  
• The increase in operating net working capital and project revenue slowdown triggered a temporary reduction in payables by €103 million, suggesting potential cash flow challenges could affect free cash flow.
  
• The market for Pulp & Paper has undergone some capacity adjustments and has had a recent history of instability and low order intake, which could influence future revenue stability.
  
• Heavy reliance on interest rate developments for financial result improvements implies potential vulnerability to financial market fluctuations, which could affect earnings if unfavorable conditions arise.

Valuation

• The analysts have a consensus price target of €71.125 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 €43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.6 billion, earnings will come to €663.9 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of €67.0, the analyst price target of €71.12 is 5.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.