Defiance And Thio-Sul Plant Launches Will Expand Chemical Production Capacity

Key Takeaways

• Strategic investments in production capacity expansion for chemicals and fertilizers aim to solidify market leadership and drive future revenue growth.
  
• Share repurchase and working capital optimization could enhance EPS, shareholder value, and cash flow efficiency, supporting higher margins and growth potential.
  
• High operational costs, reduced demand in key sectors, and elevated interest rates could compress margins and challenge Tessenderlo Group's revenue growth and stability.

Catalysts

Engages in the agriculture, valorizing bio-residuals, energy, and industrial solution businesses worldwide.

• Tessenderlo Group's strategic investment in expanding ferric chloride production capacity at Loos in France, expected to be completed by early 2026, is poised to enhance future revenue by solidifying its market position as a leading coagulant manufacturer in Europe.
  
• The upcoming completion and operational launch of the Defiance plant in early 2025 and Thio-Sul plant in late 2024 are expected to increase production capacity in sulfur-based fertilizers and sulfite chemicals, potentially driving higher future revenues and earnings.
  
• The share repurchase program, including recent significant cancellations of shares, could boost future earnings per share (EPS) and shareholder value, enhancing investor perception of the stock.
  
• Efforts to optimize working capital and inventory management demonstrated by improved cash flow from operations to €172 million could lead to more efficient cash use, potentially supporting higher net margins and earnings.
  
• Despite current challenges, the company's focus on growth capital expenditures, allowing for expansion and enhancement of operations, suggests potential for revenue growth and earnings improvements despite a challenging economic environment.

Tessenderlo Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tessenderlo Group's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.3% today to 3.1% in 3 years time.
• Analysts expect earnings to reach €91.3 million (and earnings per share of €1.82) by about February 2028, up from €89.5 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 18.1x on those 2028 earnings, up from 14.0x today. This future PE is greater than the current PE for the GB Chemicals industry at 17.1x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.34%, as per the Simply Wall St company report.

Tessenderlo Group Future Earnings Per Share Growth

Risks

• The challenging trading environment in Europe, with declining construction activity and high energy costs, could negatively affect future revenues, particularly impacting segments like Industrial Solutions.
  
• Automatic labor cost increases in Belgium have raised operational costs by 22% to 25%, potentially compressing net margins if these cannot be offset by automation or price increases.
  
• The reduction in customer demand in the textile machinery sector, adversely affecting Picanol, suggests potential declines in revenue and earnings for the Machine & Technology segment.
  
• The adjusted EBITDA guidance for 2024 is projected to drop by 5% to 10% compared to 2023, signaling potential upcoming challenges in profit margins and overall earnings.
  
• Elevated interest rates are affecting client purchasing habits, such as reduced inventories and just-in-time buying, which may harm Tessenderlo's revenue stability and growth.

Valuation

• The analysts have a consensus price target of €28.0 for Tessenderlo Group 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 €32.0, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.0 billion, earnings will come to €91.3 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of €20.55, the analyst price target of €28.0 is 26.6% 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.