New Partnerships With Dow And Viva Energy Will Expand Market Access And Drive Future Growth

Key Takeaways

• Strategic acquisitions and partnerships expand market access and product offerings, providing potential for revenue growth and enhanced earnings.
  
• Strong financial position supports leveraging M&A opportunities and strategic expansion, driving top-line growth in diverse sectors and geographies.
  
• Operational challenges such as increased freight costs, salary inflation, and regional sales volatility threaten Redox's revenue growth, profit margins, and financial stability.

Catalysts

Supplies and distributes chemicals, ingredients, and raw materials in Australia, New Zealand, the United States, and internationally.

• Redox's acquisitions, such as Oleum and Auschem, have added new products, customers, and capabilities, providing potential for revenue growth through expanded market access and product offerings.
  
• The new channel partner agreements with Dow and Viva Energy are expected to open access to additional markets and customer bases, which could boost sales revenue and improve earnings.
  
• Redox's strong net cash position and zero net debt provide it with the flexibility to leverage M&A opportunities, potentially enhancing future earnings growth through strategic acquisitions.
  
• The company is expanding its product portfolio and seeking to enter new sectors and geographies, which could drive top-line growth and increase revenue.
  
• The U.S. market, although currently showing uneven performance, holds long-term growth potential for Redox, with expected improvement in revenue and profitability as customer and sector diversification increase.

Redox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Redox's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 6.9% in 3 years time.
• Analysts expect earnings to reach A$114.0 million (and earnings per share of A$0.22) by about March 2028, up from A$90.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 17.0x today. This future PE is greater than the current PE for the AU Trade Distributors industry at 18.8x.
• 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 7.29%, as per the Simply Wall St company report.

Redox Future Earnings Per Share Growth

Risks

• The reliance on containerized freight rates, which are affected by geopolitical events, could elevate costs and delay shipping times, potentially squeezing profit margins and impacting net earnings.
  
• The subdued demand and price deflation in the first quarter suggest a challenging operating environment, posing risks to the revenue growth trajectory.
  
• The decline in U.S. sales, contrasted with APAC growth, reflects regional volatility and inconsistent performance, potentially impacting overall revenue diversification and stability.
  
• The operating costs have increased significantly due to salary inflation, headcount expansion, and incentive payments, which, if not matched by proportional revenue growth, could compress net margins.
  
• High inventory related to longer shipping times could lead to increased holding costs and potential write-downs if demand doesn't meet expectations, impacting working capital and financial flexibility.

Valuation

• The analysts have a consensus price target of A$3.738 for Redox 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 A$4.4, and the most bearish reporting a price target of just A$2.85.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.7 billion, earnings will come to A$114.0 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of A$2.95, the analyst price target of A$3.74 is 21.1% 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.