De-bottlenecking And Acquisitions Will Expand Capacity And Market Share In Bulk Stockfeeds And Pet Food

Key Takeaways

• Strategic projects and acquisitions are expected to increase capacity, market share, and revenue growth across key segments.
  
• Efficient inventory management and a share buyback plan suggest disciplined capital management and possible enhancement of shareholder returns.
  
• Ridley faces growth challenges from temporary factors, declining segment earnings, high finance costs, restructuring risks, and potential over-reliance on acquisitions.

Catalysts

Engages in the provision of animal nutrition solutions in Australia.

• The de-bottlenecking projects at Pakenham and Clifton are expected to bring increased capacity, leading to higher volumes and potential revenue growth in the Bulk Stockfeeds segment.
  
• The acquisition of the Carrick feedmill in Tasmania is anticipated to augment market share and drive volume growth, potentially bolstering revenue and earnings in the regional market.
  
• Ridley's integration and expansion efforts in the OMP business, including a new facility in Timaru, NZ, could enhance product offerings and support increased revenue in the pet food sector.
  
• The strategic reduction in inventory and improved supply chain efficiency indicate a disciplined capital management approach, potentially improving net margins.
  
• The announced share buyback of up to $20 million is expected to enhance shareholder returns and may positively impact earnings per share.

Ridley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ridley's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.1% in 3 years time.
• Analysts expect earnings to reach A$59.0 million (and earnings per share of A$0.18) by about February 2028, up from A$39.9 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 18.0x on those 2028 earnings, down from 22.7x today. This future PE is lower than the current PE for the AU Food industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.88%, as per the Simply Wall St company report.

Ridley Future Earnings Per Share Growth

Risks

• The bulk stock feeds segment showed growth primarily due to temporary conditions like dry weather, which prompted supplementary feeding. This is not a stable, long-term growth driver and could lead to inconsistent revenues.
  
• The EBITDA from the packaged and ingredients segment declined by 9%, driven by lower sales prices for tallow and meals, which could impact overall revenue if these prices do not recover.
  
• Increased finance costs due to a higher interest rate environment and additional debts for acquisitions could weigh on net margins and impact net earnings if commodity prices remain stable or decline.
  
• The company faces risks from restructuring its underperforming Aquafeed business, which incurs costs and could disrupt operations, potentially impacting net margins and earnings.
  
• Seasonal and competitive factors may limit the expected growth from the OMP business, and over-reliance on a few acquisitions could strain revenue growth and net profit margins if market conditions change unfavorably.

Valuation

• The analysts have a consensus price target of A$2.798 for Ridley 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$1.4 billion, earnings will come to A$59.0 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of A$2.83, the analyst price target of A$2.8 is 1.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.