Investments And Cost Reductions Will Improve Future Margins In Pharma And Healthcare Packaging

Key Takeaways

• The successful turnaround in Pharma and Healthcare Packaging and closure of a small mill enhance operational efficiency, pricing power, and net margins.
  
• Strategic sales and cost reduction measures improve profitability, focusing on core segments and positively impacting future earnings and revenue growth.
  
• Overcapacity in virgin cartonboard and stagnant demand in packaging signal revenue and earnings risks, while restructuring challenges may delay profitability improvements.

Catalysts

Manufactures and sells cartonboard and folding cartons in Germany, Austria, and internationally.

• The successful turnaround of the Pharma and Healthcare Packaging division indicates potential for future growth by aligning with MM's operational standards, which is likely to improve operational efficiencies and contribute positively to net margins.
  
• Continued investment in the business with a planned CapEx of around €300 million aims to increase competitiveness, which could support revenue growth and operational efficiency, impacting future earnings positively.
  
• The closure of a small recycled cartonboard mill is expected to improve the supply-demand balance, potentially leading to better pricing power and increased revenues in the Board and Paper division.
  
• The implementation of the Fit-for-Future cost reduction measures, expected to yield significant cost savings, will likely enhance earnings by reducing operational costs and improving net margins over time.
  
• The strategic sale of non-core businesses, such as the TANN business, aims to streamline operations and concentrate resources on core segments, potentially leading to improved profitability and more focused revenue growth.

Mayr-Melnhof Karton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mayr-Melnhof Karton's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 3.7% in 3 years time.
• Analysts expect earnings to reach €169.0 million (and earnings per share of €8.47) by about April 2028, up from €108.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, up from 14.1x today. This future PE is greater than the current PE for the GB Packaging industry at 14.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Mayr-Melnhof Karton Future Earnings Per Share Growth

Risks

• The start-up of a new mill in virgin cartonboard could exacerbate overcapacity issues, potentially leading to downward pressure on prices and impacting revenue growth.
  
• The failure of competitors to follow through on price increases in the recycled cartonboard market suggests pricing power may be weaker than expected, affecting margins and revenue.
  
• A flat order intake in the packaging divisions and a marginal increase in board and paper order intake signal potential stagnation in demand, which could adversely affect revenue and earnings.
  
• Ongoing restructuring and integration challenges, particularly in the Pharma and Healthcare Packaging division, might take longer to resolve, delaying anticipated improvements in profitability and margins.
  
• Overreliance on various market improvement expectations, such as European and U.S. demand or capacity rationalization by peers, presents execution risk, uncertain market conditions could lead to lower-than-expected revenue and earnings.

Valuation

• The analysts have a consensus price target of €101.833 for Mayr-Melnhof Karton 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 €115.0, and the most bearish reporting a price target of just €93.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.6 billion, earnings will come to €169.0 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of €76.1, the analyst price target of €101.83 is 25.3% 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.