Evolving Regulations And Steelmaking Tech Will Shrink Hazardous Feedstock

Key Takeaways

• Declining industrial waste and advanced production methods are set to shrink Befesa's accessible recycling feedstock and hamper future revenue growth.
  
• Heightened regulation, volatile commodity pricing, and increased competition threaten Befesa's margins, market share, and long-term earnings stability.
  
• Operational resilience, disciplined financial management, and effective hedging strategies are expected to drive stable profitability, enhanced margins, and flexibility for future growth.

Catalysts

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

• The adoption of advanced production technologies in steelmaking, such as more efficient electric arc furnaces and zero-waste manufacturing processes, is likely to significantly reduce the volume of steel dust and other hazardous byproducts available for recycling, directly shrinking Befesa's accessible feedstock and putting long-term downward pressure on revenues.
  
• The global push for resource circularity and waste minimization could lead to a structural decline in industrial waste generation, meaning the market for Befesa's hazardous waste recycling may steadily contract over time and limit top-line growth.
  
• Heightened regulatory scrutiny and continually evolving environmental standards can drive up compliance and operational costs, or restrict certain recycling activities, ultimately eroding Befesa's net margins and potentially forcing costly upgrades or process changes.
  
• Ongoing dependence on volatile zinc prices leaves Befesa's profitability exposed to commodity downcycles and increasing earnings volatility, with lower margin protection once current hedges expire after 2027.
  
• Intensifying international competition from lower-cost recycling firms in emerging markets and the risk of global supply chain shifts towards local waste processing solutions may both threaten Befesa's market share, put pressure on pricing, and limit the scale benefits needed to maintain or grow earnings over the long term.

Befesa Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Befesa compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Befesa's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.8% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach €92.7 million (and earnings per share of €2.33) by about August 2028, up from €70.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 15.1x today. This future PE is lower than the current PE for the DE Commercial Services industry at 17.2x.
• 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 5.83%, as per the Simply Wall St company report.

Befesa Future Earnings Per Share Growth

Risks

• Expansion projects in Palmerton (U.S.) and Bernburg (Germany) are progressing on time and budget, with both expected to deliver immediate cash flow upon completion, which could lift top-line revenue and earnings over the next years.
  
• A strong local-for-local operational footprint in all major regions provides resilience against geopolitical risks, trade tariffs, and supply chain disruptions, supporting stable revenues and protecting margins from external shocks.
  
• Improvement in financial leverage from 3.4 times to 2.7 times, along with a commitment to reduce it further below 2.5 times, strengthens the balance sheet and may lower financing costs, enhancing net margins and providing flexibility for future investments.
  
• Long-term hedging programs through 2027 at favorable zinc prices offer earnings visibility and buffer the company from commodity price swings, supporting stable EBITDA and profitability during periods of market volatility.
  
• Positive execution on cost reduction programs, particularly in U.S. operations (targeting 15–20 million euros in annual savings), combined with high utilization rates in the core salt slag business, are driving improved operating efficiencies and supporting net income growth.

Valuation

• The assumed bearish price target for Befesa is €28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Befesa's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €42.0, and the most bearish reporting a price target of just €28.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €92.7 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of €26.72, the bearish analyst price target of €28.0 is 4.6% higher. The relatively low difference between the current share price and the analyst bearish 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.