ERP Integration And Manufacturing Expansion Will Improve Operational Efficiency

Key Takeaways

• DGL is enhancing operational efficiency through ERP integration, asset optimization, and logistics software upgrades to improve margins and earnings.
  
• Expansion in crop protection, automotive, and environmental divisions aims to drive revenue and market share growth.
  
• Rising competition, operational challenges, and regulatory risks are constraining margins and hindering revenue and earnings growth for DGL Group.

Catalysts

Provides specialty chemical formulation, warehousing distribution, waste management and recycling solutions in Australia, New Zealand, and the United States.

• DGL is rolling out a group-wide ERP system to integrate its operations and improve efficiencies, which is expected to lead to significant cost savings and potentially improve net margins and earnings.
  
• The company is focusing on extracting profits from its existing network of assets and customer base rather than pursuing new acquisitions, which is expected to enhance operational efficiency and potentially boost earnings.
  
• DGL is expanding its manufacturing capacity and product range in its crop protection and automotive divisions, anticipating increased revenue and market share.
  
• The environmental division's liquid waste treatment development in Wollongong is expected to become a significant growth driver post-commissioning, potentially increasing revenue.
  
• Streamlining operations by consolidating sites and upgrading logistics software aims to enhance efficiency and reduce costs, likely leading to improved net margins and earnings.

DGL Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DGL Group's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 5.5% in 3 years time.
• Analysts expect earnings to reach A$33.7 million (and earnings per share of A$0.07) by about April 2028, up from A$6.2 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 5.7x on those 2028 earnings, down from 22.3x today. This future PE is lower than the current PE for the AU Chemicals industry at 20.6x.
• 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 9.2%, as per the Simply Wall St company report.

DGL Group Future Earnings Per Share Growth

Risks

• Rising competition, particularly in the recycling of used lead batteries and the automotive division, is impacting margins, which could affect revenue and net margins.
  
• Inflationary pressures and significant headcount increases have led to higher operating expenses, affecting net margins and overall earnings.
  
• The transition to a new, unified ERP system and site relocations entailed substantial costs, including software write-offs and double rent, impacting net margins and earnings in the short term.
  
• The Environmental division faces underperformance due to increased competition and difficulties in the market for used lead acid batteries, which could negatively impact revenue and profitability.
  
• Regulatory challenges and the necessity of acquiring difficult-to-obtain licenses create operational risks, potentially affecting future growth opportunities and earnings.

Valuation

• The analysts have a consensus price target of A$0.52 for DGL Group 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$609.7 million, earnings will come to A$33.7 million, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 9.2%.
• Given the current share price of A$0.48, the analyst price target of A$0.52 is 6.7% higher. 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.