Revenue Declines Expected, But Cementos Argos And Celsia's Initiatives May Boost Earnings

Key Takeaways

• Simplifying the shareholder structure and focusing on infrastructure could enhance investor appeal and operational efficiency for Grupo Argos.
  
• Strategic expansions in cement, solar energy, and infrastructure projects are likely to boost revenue and improve profitability over time.
  
• Grupo Argos is focusing on infrastructure, renewable energy, and real estate to unlock shareholder value, enhance stability, and improve margins.

Catalysts

An infrastructure holding company, engages in cement business.

• Grupo Argos is exploring a simplification of its shareholder structure through a memorandum of understanding with Grupo Sura. This simplification is expected to enhance investor appeal and align with global investment trends, potentially boosting stock attractiveness and impacting future valuations positively.
  
• The company is focusing its portfolio on infrastructure, targeting a 100% specialization in this sector. This strategic focus might lead to higher operational efficiency and profitability, potentially increasing future revenues and net margins.
  
• Cementos Argos, a key subsidiary, is focusing on profitability and cost-efficiency, with plans to capture $40 million in synergies from its integration with Summit Materials. These measures are likely to support EBITDA growth, enhancing the earnings outlook.
  
• Expansion efforts in Celsia's solar energy generation capacity and the development of new energy projects, such as the first solar storage system in Colombia, indicate potential future revenue growth and margin improvements in the energy segment.
  
• Odinsa is advancing significant infrastructure projects, including the expansion of major road tunnels and airport facilities, which are expected to generate new revenue streams and improve overall profitability, positively impacting net margins in the long run.

Grupo Argos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Argos's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.0% today to 5.8% in 3 years time.
• Analysts expect earnings to reach COP 1350.8 billion (and earnings per share of COP 1555.0) by about January 2028, up from COP -455.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from -38.7x today. This future PE is lower than the current PE for the CO Basic Materials industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.37%, as per the Simply Wall St company report.

Grupo Argos Future Earnings Per Share Growth

Risks

• Grupo Argos' strategic memorandum of understanding with Grupo Sura aims to simplify their cross-participation structure, possibly unlocking value for shareholders and aligning with global investor trends, which could positively impact revenue and shareholder value.
  
• The company's transition to specializing in infrastructure, particularly through transactions such as with Summit Materials, focuses on consolidating investment and growth in this sector, potentially enhancing revenue and earnings stability.
  
• Efforts to reduce debt and operational costs, while doubling EBITDA between 2015 and 2023, demonstrate financial prudence, which could result in improved net margins and profitability.
  
• Grupo Argos' investment and expansion in renewable energy through Celsia, alongside the development of large-scale solar energy storage, positions the company for growth in the clean energy sector, positively affecting future revenues and net margins.
  
• The commitment to real estate development, evident in the growth of Pactia's portfolio, combined with strong occupancy rates, reflects potential for stable income streams and positive impacts on earnings.

Valuation

• The analysts have a consensus price target of COP 15865.0 for Grupo Argos 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 COP 21760.0, and the most bearish reporting a price target of just COP 11600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be COP 23380.2 billion, earnings will come to COP 1350.8 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 17.4%.
• Given the current share price of COP 20600.0, the analyst's price target of COP 15865.0 is 29.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.