Diversifying Into Aluminum And Economic Recovery In Queensland May Improve Future Prospects Despite Inflation Pressures

Key Takeaways

• Ongoing expansion into aluminum and new markets could drive growth by diversifying offerings and tapping into emerging opportunities.
  
• Strategic focus on mergers, acquisitions, and optimization of acquired assets may enhance market share, profitability, and earnings potential.
  
• Robust financial management and economic improvement in key markets enhance Vulcan Steel's resilience and potential for growth, with low revenue concentration risk.

Catalysts

Engages in the sale and distribution of steel and metal products in New Zealand and Australia.

• Vulcan Steel's ongoing expansion into aluminum and new geographies could drive revenue growth by tapping into emerging markets and diversifying product offerings.
  
• The anticipated economic upswing in key markets like Queensland, driven by projects such as the upcoming Olympics, may positively impact revenue and earnings projections.
  
• Efforts to improve operational efficiency and service levels across its 66 sites could result in higher net margins and improved profitability despite inflationary pressures.
  
• The integration and performance optimization of acquired businesses, including the aluminum segment and hybrid sites, suggest potential enhancements to earnings and return on capital employed.
  
• A strategic focus on mergers and acquisitions, along with new product and service offerings, may expand Vulcan's market share, contributing to future revenue growth.

Vulcan Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vulcan Steel's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 7.7% in 3 years time.
• Analysts expect earnings to reach NZ$99.0 million (and earnings per share of NZ$0.7) by about February 2028, up from NZ$23.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$85.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 50.8x today. This future PE is about the same as the current PE for the AU Metals and Mining industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Vulcan Steel Future Earnings Per Share Growth

Risks

• Vulcan Steel has managed to reduce its debt by $148 million, matching its debt-funded acquisition, which indicates robust financial management and could positively impact net margins.
  
• Despite a challenging environment, Vulcan Steel successfully integrated its aluminum business and implemented 13 hybrid sites, suggesting resilience and potential revenue growth.
  
• New Zealand and Queensland, which together represent around 60% of Vulcan's revenue, are showing signs of economic improvement, potentially leading to a recovery in these key markets and boosting overall revenues.
  
• The company has maintained a disciplined approach to cost management, lowering its operating expenditure and steadying its gross margin, which may positively influence the company's future earnings.
  
• Vulcan Steel’s broad customer base and low revenue concentration risk (with the top 20 clients representing just 9% of revenue) suggest revenue resilience and reduced dependency on individual client performance.

Valuation

• The analysts have a consensus price target of A$7.142 for Vulcan Steel 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$8.09, and the most bearish reporting a price target of just A$5.94.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$1.3 billion, earnings will come to NZ$99.0 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of A$8.0, the analyst price target of A$7.14 is 12.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.