Investments In Chlorination, Weaving And Fertilizers Will Reshape Capabilities

Key Takeaways

• Expansion efforts, including Kuhlmann's investment and strategic acquisitions, are set to boost revenue growth, market diversification, and product innovation.
  
• Share repurchase program and market ventures are likely to enhance EPS, shareholder value, and operational efficiency through increased demand and sustainability initiatives.
  
• Tessenderlo Group's profitability and stability are challenged by revenue decline, segment margin pressures, geopolitical risks, and industry downturns in key markets.

Catalysts

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

• The company's investment in a €35 million state-of-the-art chlorination installation for its ferric chloride production subsidiary, Kuhlmann, is expected to enhance industrial solutions capabilities. This could lead to revenue growth and improved market position by 2026.
  
• Tessenderlo Group's share repurchase program, which includes canceling 24.2 million shares, is likely to positively impact earnings per share (EPS) as the share count decreases, potentially increasing shareholder value.
  
• The launch of the Supermax Rapier weaving machine, targeted at the Chinese market, and the opening of a new liquid fertilizer plant in Geleen underscore initiatives in innovation and market expansion, potentially driving revenue and margin growth due to increased demand and efficiency.
  
• The homologation of Thio-Sul by the French government could enhance product appeal and sales in agriculture, leading to higher revenue as the product assists in reducing fertilizers' volatilization and leaching, promoting sustainable farming practices.
  
• The strategic acquisition of Tiger-Sul Products expands Tessenderlo into dry sulfur fertilizers, increasing geographic and product diversification. This can potentially drive revenue growth and enhance margins due to a stronger foothold in North America and expanded product offerings.

Tessenderlo Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tessenderlo Group's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 3.2% in 3 years time.
• Analysts expect earnings to reach €94.1 million (and earnings per share of €1.54) by about April 2028, up from €42.8 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 20.9x on those 2028 earnings, down from 35.5x today. This future PE is lower than the current PE for the GB Chemicals industry at 25.2x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Tessenderlo Group Future Earnings Per Share Growth

Risks

• The Tessenderlo Group faced a challenging year in 2024, with revenues decreasing by 9.6% compared to 2023 and adjusted EBITDA dropping by 16.7%, potentially impacting the company's earnings and financial stability.
  
• The Bio-valorization segment showed a significant vulnerability, with 23% of group revenues but only 3.5% of group EBITDA, indicating margin pressures and potentially impacting overall profitability.
  
• The company is grappling with declining demand and alternative products in the bone gelatin sector, leading to plant closures and restructuring costs, which could affect both operating costs and net margins.
  
• Due to geopolitical tensions and reliance on complex supply chains, uncertainties in sourcing materials like MOP for fertilizers present potential risks that could disrupt production and revenue growth.
  
• The Picanol weaving machines and Industrial Solutions segments have suffered from industry downturns, especially in textile and construction markets, which could limit future revenue growth in these areas.

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 €94.1 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 6.6%.
• Given the current share price of €25.25, the analyst price target of €28.0 is 9.8% 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.