Over $90 Million In SURF Orders Will Drive Future Opportunities

Key Takeaways

• Revenue growth is expected through increased project activity and strategic positioning in strong markets like subsea production and SURF.
  
• Expanding in defense and renewable energy sectors offers substantial growth, enhanced revenue diversification, and improved net margins.
  
• The company's reliance on project conversions, capacity challenges, major clients, and emerging market timelines could impact revenue growth and earnings stability.

Catalysts

Engages in the design, engineering, and manufacturing of engineered polymer products for the energy, mining and resource, and defence industries.

• The company anticipates significant revenue growth driven by an increase in project activity across various markets, with a forecasted full-year revenue of approximately $85 million, up from $27 million in the first half. This is expected to positively impact future revenue figures.
  
• Matrix Composites & Engineering is leveraging its large installed capacity in subsea production and the SURF market, which has received over $90 million in orders since June 2022. This could lead to sustained revenue growth and improve net margins, as these markets are anticipated to remain strong until at least 2030.
  
• The Advanced Materials segment presents a substantial growth opportunity, with capabilities in high-performance engineering plastics applicable to various sectors, including defense and renewable energy. Success in this area could enhance revenue diversification and potentially boost net margins due to its growing demand.
  
• An increase in inquiries from the offshore floating wind market is expected, a sector projected to grow significantly towards the end of the decade. With large-scale projects anticipated, this market could contribute to revenue growth and positively influence earnings in the future.
  
• The company is investing in project molds and tooling, reflecting its readiness to capitalize on market opportunities. This capital expenditure could lead to increased efficiency and profitability, thereby improving net margins and overall financial performance.

Matrix Composites & Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matrix Composites & Engineering's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 4.6% in 3 years time.
• Analysts expect earnings to reach A$5.0 million (and earnings per share of A$0.02) by about February 2028, up from A$3.6 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 22.5x on those 2028 earnings, up from 13.8x today. This future PE is greater than the current PE for the AU Energy Services industry at 8.8x.
• 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 9.55%, as per the Simply Wall St company report.

Matrix Composites & Engineering Future Earnings Per Share Growth

Risks

• The company's future revenue is heavily reliant on the successful conversion of its large pipeline of competitive quotations, particularly in the SURF and drilling markets, which are subject to delays and uncertainties. This may affect projected revenue growth if projects don't convert as expected.
  
• There is an operational risk associated with a significant increase in project activity expected for the second half of the financial year, which could challenge the company's capacity to deliver within projected timelines, potentially impacting earnings.
  
• The fluctuating demand for the Corrosion Technologies segment, heavily influenced by major clients’ maintenance schedules like Woodside, introduces variability in revenue and underscores the business's dependence on a few major clients.
  
• The company faces financial risks related to cash flow and working capital management, including substantial cash-backed performance bonds for SURF market contracts, which may limit available capital for other uses, potentially impacting net margins.
  
• The offshore floating wind market and deep sea mining, while promising, are emerging markets with uncertain timelines, implying that anticipated revenue increases may not materialize as expected if these markets develop more slowly, affecting revenue projections.

Valuation

• The analysts have a consensus price target of A$0.383 for Matrix Composites & Engineering 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$0.44, and the most bearish reporting a price target of just A$0.33.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$108.0 million, earnings will come to A$5.0 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of A$0.22, the analyst price target of A$0.38 is 41.3% 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.