Wood Division Demand And Investments Will Strengthen Future Market Position

Key Takeaways

• Consistent demand growth in the Wood Division and strategic investments in various units could enhance revenue and net margins.
  
• Optimizing cash generation and focusing on brand presence may strengthen earnings and market share amid effective cost management.
  
• Challenging market conditions in the ceramic tiles sector, high leverage, and cost structure issues could impact Dexco's revenue growth and financial flexibility.

Catalysts

Engages in the production and sale of wooden panels in Brazil and internationally.

• The Wood Division is seeing consistent demand growth, driven by the furniture and retail sectors, and maintaining good panel pricing. This is expected to positively impact revenue growth in the coming years.
  
• Investment in the new floor tiles unit at Botucatu and enhancements in product offerings in the Metals and Sanitary ware divisions could improve product mix and operational efficiencies, potentially boosting net margins.
  
• The Casa Dexco initiative aims to bolster brand presence and enhance consumer experience, which could translate into increased sales and market share, thereby positively influencing future revenue streams.
  
• Strategic completion of the 2021-2025 investment cycle and a focus on leveraging recent capital investments are expected to optimize cash generation and enhance earnings as the company prioritizes debt reduction.
  
• LD Celulose's operational excellence and cost management, coupled with its dollarized revenue benefiting from local currency devaluation, are expected to remain strong, likely positively affecting earnings stability or growth.

Dexco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dexco's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 7.3% in 3 years time.
• Analysts expect earnings to reach R$691.3 million (and earnings per share of R$0.46) by about April 2028, up from R$172.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.2 billion in earnings, and the most bearish expecting R$224.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, down from 24.0x today. This future PE is greater than the current PE for the BR Forestry industry at 14.9x.
• 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 26.12%, as per the Simply Wall St company report.

Dexco Future Earnings Per Share Growth

Risks

• The ongoing pressures in the ceramic tiles sector, including a previous 30% drop and an estimated 4% recovery, highlight challenging market conditions that could impact Dexco's revenues and net margins in the future.
  
• Dexco's mention of the increased competition and high industry stock levels in the tiles division, which make achieving stable results difficult, suggests potential challenges in maintaining or increasing market share and net revenue.
  
• The volatility in foreign exchange rates and increasing costs of dollarized inputs and commodities like urea and ethanol pose ongoing cost structure challenges, which could negatively affect net margins and earnings.
  
• Dexco's current high leverage levels, with net debt-to-EBITDA around 3.01x, alongside a high cost of debt, could limit financial flexibility and pressure net margins and cash flow, impacting future investment capability.
  
• Challenges in the macroeconomic environment, including high interest rates and uncertainties in demand, especially in segments like Deca tiles, present risks that could affect overall revenue growth and bottom-line profitability.

Valuation

• The analysts have a consensus price target of R$9.011 for Dexco 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 R$10.5, and the most bearish reporting a price target of just R$6.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$9.4 billion, earnings will come to R$691.3 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 26.1%.
• Given the current share price of R$5.11, the analyst price target of R$9.01 is 43.3% 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.