Palmerton Expansion And Cost Reductions Will Improve US Zinc Recycling Operations

Key Takeaways

• Befesa anticipates significant EBITDA growth from improved zinc hedging, expanded U.S. recycling, and cost reductions in zinc refining operations.
  
• Strategic investments in capacity expansion and low-risk projects are poised to enhance revenue stability, capturing market growth.
  
• Operational challenges and market pressures in Europe, the U.S., and China threaten Befesa's profitability, growth prospects, and financial flexibility.

Catalysts

Offers environmental recycling services to the steel and aluminum industries in European, Asian, and North American markets.

• Befesa expects improved financial performance in 2025 with strong double-digit EBITDA growth driven by better zinc hedging levels, increased steel dust recycling volumes in the U.S., and lower zinc refining costs, which are likely to enhance earnings.
  
• The refurbishment and capacity expansion of the Palmerton plant in the U.S. is slated to increase steel dust recycling capacity, potentially boosting revenue as it captures market growth.
  
• Growth CapEx is strategically focused on ongoing low-risk projects like Palmerton and Bernburg, expected to immediately contribute to cash flows, enhancing revenue stability and lowering leverage.
  
• Cost reduction measures in the U.S. zinc refining operations aim to cut costs by around $20 million annually, projected to improve net margins as operational efficiencies increase.
  
• Reducing coke prices and ongoing operational improvements in U.S. recycling operations are expected to drive EBITDA growth, potentially leading to better net margins.

Befesa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Befesa's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 6.8% in 3 years time.
• Analysts expect earnings to reach €96.1 million (and earnings per share of €2.4) by about February 2028, up from €55.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €121 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 15.9x today. This future PE is greater than the current PE for the DE Commercial Services industry at 14.5x.
• Analysts expect the number of shares outstanding to grow by 3.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Befesa Future Earnings Per Share Growth

Risks

• The challenging automotive industry in Europe, characterized by weak demand and production of cars, is negatively impacting Befesa's secondary aluminum business, potentially compressing aluminum metal margins and affecting overall profitability.
  
• The U.S. zinc refining operations are under pressure due to low treatment charges (TCs) and low premiums for special high-grade zinc, leading to a double-digit negative contribution in 2024, thereby impacting net margins.
  
• The stoppage of expansion plans in China, due to current unfavorable market conditions, limits potential growth and could affect future revenue streams from this market.
  
• The current high leverage ratio of Befesa at 3.36x could constrain financial flexibility, affecting their ability to manage financial risk and invest in future growth initiatives.
  
• The lower utilization rates in certain regions, particularly in the U.S. steel dust recycling business (at around 70% utilization), and the strike at the Turkish plant, demonstrate operational risks that could hinder revenue growth.

Valuation

• The analysts have a consensus price target of €33.0 for Befesa 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 €45.0, and the most bearish reporting a price target of just €24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €96.1 million, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €22.0, the analyst price target of €33.0 is 33.3% 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.