Maturing Olive Groves And US Expansion Will Boost Future Production

Key Takeaways

• Strategic expansion and infrastructure improvements in the U.S. and Australia are set to significantly boost production capacity and revenue.
  
• Increased competitiveness in the U.S. market and strategic partnerships are expected to drive sustained revenue growth and market share expansion.
  
• High product pricing and increased U.S. investments pose financial risks, impacting future revenue, net margins, and confidence amidst fluctuating international markets.

Catalysts

Engages in olive farming and the production and marketing of olive oil in Australia, the United States, and internationally.

• The significant increase in land acquisitions and planned planting in the U.S., which is set to more than double the current planted area, indicates significant future growth in production capacity. This will likely increase future revenue as Cobram Estate Olives expands their supply to meet demand.
  
• The maturity trajectory of olive groves both in Australia and the U.S. suggests a natural increase in yield without additional capital expenditure, leading to higher revenue and potentially improved net margins due to economies of scale.
  
• The completion of major infrastructure projects, such as the Boort mill upgrade in Australia and the Woodland site expansion in California, enhances production and storage capacity, positioning the company to handle increased output efficiently, which is likely to positively impact future earnings.
  
• Strategic partnerships and long-term agreements with third-party growers in the U.S. are expected to secure additional supply, supporting sustained branded sales growth and revenue increases.
  
• The anticipated impact of potentially favorable U.S. tariffs against European imports could enhance competitiveness and demand for the company’s domestically produced oils, which would likely lead to revenue growth and improved market share in the U.S.

Cobram Estate Olives Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cobram Estate Olives's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 10.4% in 3 years time.
• Analysts expect earnings to reach A$41.7 million (and earnings per share of A$0.1) by about March 2028, up from A$21.3 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 25.9x on those 2028 earnings, down from 37.0x today. This future PE is lower than the current PE for the AU Food industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

Cobram Estate Olives Future Earnings Per Share Growth

Risks

• The company reported a loss after tax of $4.5 million, despite an improved EBITDA, which could impact net earnings and investor confidence.
  
• The current high pricing level for their products may not be sustainable due to international market fluctuations and competition, potentially affecting future revenue and net margins.
  
• A noncurrent tax liability of $83 million on the balance sheet might pose future financial stress if assets are sold outside the group, impacting net earnings.
  
• The net debt ratio has increased from 31.5% to 34.4% over the 6-month period and was 33.5% this time last year; a continuous rise could affect financial health.
  
• The company is heavily investing in the U.S. market, spending over $32 million on land and CapEx, which introduces execution risks, potentially impacting future profitability and debt levels.

Valuation

• The analysts have a consensus price target of A$2.143 for Cobram Estate Olives 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$401.0 million, earnings will come to A$41.7 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of A$1.88, the analyst price target of A$2.14 is 12.3% 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.