Subsea And Renewable Energy Sectors Will Offer Potential, But Cash Flow Fluctuations May Challenge Operations

Key Takeaways

• Strong revenue growth is driven by demand for subsea products, diversification in advanced materials, and opportunities in renewable energies.
  
• Strategic positioning in global deepwater projects and offshore wind markets enhances market share and supports long-term revenue gains.
  
• Delays in contract awards and project timelines may affect short-term revenue, cash flow stability, and operational efficiency across various sectors.

Catalysts

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

• Matrix Composites & Engineering is experiencing strong revenue growth driven by increased demand for subsea products, especially from their SURF product line, which is on track to secure $60 million in revenue for FY '25. This expansion significantly impacts revenue growth.
  
• The company is further diversifying its revenue streams with continued growth expected in its Advanced Materials sector, particularly in resources and renewable energies, which is anticipated to positively affect earnings and reduce risk concentration.
  
• With an increase in global deepwater oil and gas projects projected to 2030, Matrix is strategically positioned to capture a larger market share of the subsea CapEx spend, which is expected to boost long-term revenue.
  
• The potential growth in the floating offshore wind market represents a substantial opportunity for Matrix to leverage its expertise in producing large quantities of subsea buoyancy, aiding revenue expansion in the renewable energy sector.
  
• Matrix's solid financial position, with increased cash reserves and a focus on managing working capital efficiently, supports scaling up operations and ensures financial flexibility for sustained growth, positively affecting net margins.

Matrix Composites & Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matrix Composites & Engineering's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 0.6% in 3 years time.
• Analysts expect earnings to reach A$604.1 thousand (and earnings per share of A$0.01) by about March 2028, down from A$8.5 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 151.6x on those 2028 earnings, up from 5.1x today. This future PE is greater than the current PE for the AU Energy Services industry at 5.3x.
• Analysts expect the number of shares outstanding to grow by 1.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.05%, as per the Simply Wall St company report.

Matrix Composites & Engineering Future Earnings Per Share Growth

Risks

• Delays in customer awards might push expected revenue into the next financial year, which could affect short-term revenue and financial projections.
  
• There are significant fluctuations in cash flow and working capital due to project cycles, which might impact the company's ability to consistently maintain positive cash flow.
  
• The drilling sector has been softer than expected, indicating reduced discretionary spending on replacements, which could affect revenue from this market.
  
• Some delays in defense contracts could affect the Advanced Materials division, potentially slowing down expected growth and impacting revenues in this sector.
  
• Potential delays from large engineering projects and customer timelines could compress delivery schedules, influencing operational efficiency and earnings.

Valuation

• The analysts have a consensus price target of A$0.29 for Matrix Composites & Engineering based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$105.5 million, earnings will come to A$604.1 thousand, and it would be trading on a PE ratio of 151.6x, assuming you use a discount rate of 10.1%.
• Given the current share price of A$0.19, the analyst price target of A$0.29 is 32.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.