Global Commercialization Of NovacqPro Will Open New Revenue Streams

Key Takeaways

• Strategic acquisitions and market expansion, notably in pet food and prawn markets, are expected to significantly elevate earnings and market presence.
  
• Operational efficiency improvements and high-margin focus are poised to boost net margins and reduce costs over the long term.
  
• Elevated finance costs from acquisitions and higher interest rates may pressure net margins and earnings if interest rates remain high or increase.

Catalysts

Engages in the provision of animal nutrition solutions in Australia.

• The acquisition of OMP has exceeded expectations and is expected to continue contributing positively to earnings growth, reflected in stable or growing EBITDA, supported by successful customer contracting for the upcoming calendar year.
  
• The three-year growth plan emphasizes expanding market share in bulk stock feeds and developing the ingredient recovery offering for pet food producers, which is likely to enhance revenue and market reach.
  
• Streamlining operations, including exiting lower-return operations and focusing on higher-margin activities, is projected to result in $5 million annualized cost savings starting FY '26, which will improve net margins.
  
• The commercialization of NovacqPro in the global prawn market and potential new market entries in Southeast Asia will create new revenue streams, anticipated to positively impact overall earnings.
  
• The Carrick feed mill acquisition and second-shift implementation are projected to contribute approximately $1.5-$2 million to EBITDA annually, enhancing revenue and asset utilization.

Ridley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ridley's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.0% in 3 years time.
• Analysts expect earnings to reach A$55.3 million (and earnings per share of A$0.18) by about April 2028, up from A$40.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$49.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 17.8x today. This future PE is lower than the current PE for the AU Food industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 4.84% 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.

Ridley Future Earnings Per Share Growth

Risks

• The Victorian avian influenza outbreak and the lack of supplementary feeding in the beef and sheep sectors negatively impacted Bulk Stockfeeds segment EBITDA, which could pressure revenue and net margins if such events occur again.
  
• Lower sales prices for tallow and meals have affected the Packaged Feeds and Ingredients segment, which could lead to reduced revenue and pressure earnings if these prices do not recover.
  
• Higher interest rates and increased debt levels due to recent acquisitions have elevated finance costs, which could pressure net margins and earnings if interest rates remain high or increase.
  
• The geographical shift in broiler producer expansions could affect market share gains in the monogastric sector, potentially impacting revenue growth.
  
• Significant capital expenditures are required for debottlenecking projects, which, while potentially beneficial in the long term, could strain cash flow and net margins if not managed effectively.

Valuation

• The analysts have a consensus price target of A$2.728 for Ridley 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$3.15, and the most bearish reporting a price target of just A$2.25.
• 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$55.3 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of A$2.26, the analyst price target of A$2.73 is 17.1% 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.