Lower Net Debt And Efficient Atlantic Salmon Operations May Boost Financial Stability In 2025

Key Takeaways

• Improved net margins and potentially higher earnings expected due to cost-saving initiatives and reduced risks.
  
• Enhanced financial health and lower leverage may support growth initiatives and lower interest expenses.
  
• Declining salmon prices, market demand issues, and a terminated joint venture severely impacted 2024 results, with ongoing challenges expected for revenue and margins.

Catalysts

Engages in the salmon farming business in Chile.

• The anticipated 15% increase in stocking for Atlantic salmon in 2025 could lead to greater production volumes, which may drive revenue growth as long as demand remains stable or increases.
  
• Cost-saving initiatives, including productivity improvements that resulted in $7 million in savings in 2024, and the expectation that these savings will continue through 2025, are likely to improve net margins by reducing operational costs.
  
• Decreased biological and sanitational risks, with Atlantic salmon mortality rates significantly below industry averages, suggest improved operational efficiency and potentially higher earnings due to lower costs associated with losses.
  
• The strategic pause and market exploration in Coho farming, alongside maintaining a strong presence and product development, could lead to better market positioning and eventual revenue growth, despite the current short-term stability.
  
• The continued reduction in net debt-to-EBITDA ratio and decreasing financial leverage suggest enhanced financial health, which could improve earnings through reduced interest expenses and foster further investment in growth initiatives.

Salmones Camanchaca Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Salmones Camanchaca's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $32.4 million (and earnings per share of $0.44) by about April 2028, up from $13.9 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 9.4x on those 2028 earnings, down from 15.9x today. This future PE is greater than the current PE for the CL Food industry at 8.4x.
• 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 9.84%, as per the Simply Wall St company report.

Salmones Camanchaca Future Earnings Per Share Growth

Risks

• The company experienced declining prices for Atlantic salmon by 6% and Coho by 16% during 2024, which negatively impacted revenue. Prices were depressed throughout the year and only saw some recovery in the last two months.
  
• There is no current plan for expansion in Coho farming, which limits potential revenue growth opportunities in this segment. Additionally, Coho is expected to play a very minimal role in 2025.
  
• The termination of the company’s Trout joint venture resulted in weak results for 2024 and is expected to have lingering financial effects in 2025. This could potentially affect net margins and earnings.
  
• The 2024 performance was affected by weaker-than-expected demand in the U.S. market, which contributed to depressed prices and could continue to impact future revenue if demand does not improve.
  
• While some cost-saving initiatives have been implemented, future cost control remains uncertain due to factors such as biological conditions and potential incidents affecting mortality and growth rates, which could impact net margins.

Valuation

• The analysts have a consensus price target of CLP2936.4 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 $433.5 million, earnings will come to $32.4 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 9.8%.
• Given the current share price of CLP2810.2, the analyst price target of CLP2936.4 is 4.3% higher. 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.