Packaging Demand And Software Offerings Will Drive Stronger Long Term Earnings Narrative

Catalysts

About Koenig & Bauer

Koenig & Bauer is a global printing and packaging machinery manufacturer with a growing focus on software enabled, value added print and packaging solutions.

What are the underlying business or industry changes driving this perspective?

• Expansion in high growth regions such as India and the Middle East, where packaging demand is expected to grow at mid to high single digit to double digit rates, is expected to convert the historically strong order backlog into structurally higher revenue.
• New software offerings like protected at print and AURAVEO, which monetize banknote security know how and connected packaging capabilities, can add scalable, high margin recurring revenue streams that progressively lift group net margins.
• The Spotlight cost program has reset the structural cost base in S&T and improved capacity utilization, so even modest volume growth is expected to translate into stronger operating leverage and higher EBIT.
• A mix shift toward resilient packaging and security printing applications, supported by regulatory changes such as new barcode and traceability requirements, is expected to stabilize orders and support earnings growth through less cyclical, higher value projects.
• Ongoing efforts to diversify away from tariff burdened North American demand toward Asia, the Middle East and Latin America, while maintaining a historically high order backlog above EUR 1 billion, provide visibility that supports revenue growth and cash generation as inventories are converted into shipments.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Koenig & Bauer's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.2% today to 5.3% in 3 years time.
• Analysts expect earnings to reach €76.8 million (and earnings per share of €4.63) by about December 2028, up from €-15.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €109.6 million in earnings, and the most bearish expecting €60.2 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.3x on those 2028 earnings, up from -11.4x today. This future PE is lower than the current PE for the GB Machinery industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent trade tensions and structurally higher U.S. tariffs on machines and key components make Koenig & Bauer’s products more expensive in a major market, which can depress order volumes, shift business to lower margin regions and ultimately weigh on revenue and EBIT.
• The current record order backlog and inventory build are supporting near term utilization, but if underlying demand weakens further or stays subdued in core regions like Europe and North America, the company may struggle to replenish orders at attractive pricing, putting pressure on long term revenue and earnings.
• Mix and geographic shifts toward faster growing but structurally lower margin markets in Asia, the Middle East and Latin America could blunt the benefit of cost savings from the Spotlight program and limit future improvement in group net margins and EBIT.
• Digital & Web and new software initiatives such as protected at print and AURAVEO are still in early stages and face adoption risks, particularly with the U.S. being a key hi tech market under tariff pressure, which may delay the emergence of scalable, high margin recurring revenue and constrain long term earnings growth.
• The recent step change in profitability is heavily supported by cost cutting and efficiency gains, and if wage inflation, supply chain disruptions or higher financing and guarantee costs re emerge while order intake remains under pressure, the company could see margins, free cash flow and net earnings deteriorate again from current levels.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €18.18 for Koenig & Bauer 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 €21.0, and the most bearish reporting a price target of just €16.9.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €76.8 million, and it would be trading on a PE ratio of 5.3x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of €10.64, the analyst price target of €18.18 is 41.5% 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.