Palmerton Refurbishment And Bernburg Expansion Will Strengthen Future Capacity

Key Takeaways

• Strategic expansions and operational improvements are expected to increase capacity, improve revenues, and enhance profit margins through cost reductions.
  
• Deleveraging and better zinc hedging provide financial stability, allowing improved capital allocation and earnings predictability.
  
• Weak demand in the European steel and automotive sectors, alongside challenges in market diversification and operational costs, constrain Befesa's growth and profit margins.

Catalysts

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

• Expansions in key geographical areas, such as the completion of projects like the Palmerton refurbishment and Bernburg expansion, are expected to increase Befesa's capacity and improve revenues significantly in the coming years.
  
• Operational improvements and cost reductions, particularly in the zinc refining operations in the U.S., are projected to enhance margins by reducing expenses, contributing positively to the overall earnings.
  
• Better zinc hedging levels have been locked in for the next few years, providing greater visibility and predictability of earnings and potentially increasing EBITDA.
  
• Secure high capacity utilization levels in core markets, with stable volumes expected, could maintain or improve profit margins despite challenging conditions in steel and aluminum markets.
  
• Strategic focus on deleveraging and reducing net debt could improve the company's financial health, allowing for better capital allocation towards growth initiatives, which could enhance earnings.

Befesa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Befesa's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 7.3% in 3 years time.
• Analysts expect earnings to reach €105.4 million (and earnings per share of €2.63) by about April 2028, up from €50.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €122.6 million in earnings, and the most bearish expecting €88.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 18.8x today. This future PE is lower than the current PE for the DE Commercial Services industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Befesa Future Earnings Per Share Growth

Risks

• The European steel sector is at a 5-year low with weak demand, potentially limiting growth opportunities in Befesa's steel dust recycling business and impacting future revenues.
  
• Secondary aluminum operations are affected by a weak automotive industry in Europe, leading to decreased demand and pressure on aluminum metal margins, which could reduce earnings and profit margins.
  
• Unfavorable market conditions have stalled the expansion plans in China, which could limit Befesa's revenue growth and market diversification.
  
• The zinc refining operations in the U.S. have faced a €15 million negative contribution due to turnaround efforts, indicating potential cost challenges that could pressure net margins.
  
• Scarcity of aluminum scrap in Europe and increased exports away from Europe are compressing aluminum margins, which could negatively impact revenue and profitability if the situation persists.

Valuation

• The analysts have a consensus price target of €33.1 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 €105.4 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of €23.9, the analyst price target of €33.1 is 27.8% 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.