Atlantic Salmon Expansion And Debt Reduction Will Improve Future Performance

Key Takeaways

• Exceptional biological performance and strategic resource allocation potentially lower production costs and enhance net margins.
  
• Flexibility in product formats and strategic agreements with customers may stabilize revenues amidst market volatility.
  
• Weaker demand, costs, and financial leverage risks could strain Salmones Camanchaca's margins, profitability, and revenue growth.

Catalysts

Engages in the salmon farming business in Chile.

• Salmones Camanchaca's exceptional biological performance, particularly in reducing mortality rates and achieving better-than-industry feed conversion and growth metrics, positions the company to potentially lower production costs further. This can lead to improved net margins.
  
• The company's strategy of enhancing product value through flexibility in formats and maintaining medium-term agreements with key customers helps achieve prices above market rates, potentially boosting revenue stability even in volatile markets.
  
• Planned increases in Atlantic salmon production by adding new sites could result in a 10% rise in harvest volumes in 2025, directly impacting future revenue growth.
  
• Strategic reduction of Coho production in response to current demand trends showcases adaptability in resource allocation, possibly redirecting focus towards higher-margin and more stable product lines, thereby positively influencing net income.
  
• Debt management efforts, including a reduction in net debt and improved EBITDA financing ratios, could lead to lower financial expenses over time, enhancing overall earnings.

Salmones Camanchaca Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Salmones Camanchaca's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $39.7 million (and earnings per share of $0.52) by about January 2028, up from $3.5 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 6.1x on those 2028 earnings, down from 54.3x today. This future PE is lower than the current PE for the CL Food industry at 9.7x.
• Analysts expect the number of shares outstanding to grow by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.6%, as per the Simply Wall St company report.

Salmones Camanchaca Future Earnings Per Share Growth

Risks

• The 12% drop in total operating revenues compared to the previous year due to lower sales volumes and declining sales prices for Atlantic salmon could impact revenue growth.
  
• A market context of weaker global demand and a 7% drop in Chilean supply, leading to lower Urner Barry price levels, poses risks to future profit margins.
  
• Higher processing costs resulting from a greater share of value-added products and lower volumes might pressure net margins.
  
• While the Trout joint venture generated a loss, an early termination agreement could entail potential financial impacts until the stock concludes in 2025, thus affecting earnings.
  
• The continued elevated net debt-to-EBITDA ratio of 3.95x, despite being back within the agreed range, suggests ongoing financial leverage risks that could affect profitability and earnings stability.

Valuation

• The analysts have a consensus price target of CLP2372.24 for Salmones Camanchaca 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 $418.8 million, earnings will come to $39.7 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of CLP2540.0, the analyst's price target of CLP2372.24 is 7.1% lower. 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.