Weak European Markets Will Stunt Revenues Yet Allow Decarbonization Gains

Key Takeaways

• Weakness in core European industries and regional steel production constrains input volumes and revenue, despite long-term opportunities from global decarbonization and urbanization trends.
  
• Growth is increasingly reliant on US market performance and operational efficiencies, with exposure to cost inflation, regulatory risk, and technological competition threatening future margins.
  
• High energy costs, weak end-market demand, and overreliance on favorable commodity conditions limit profitability and growth, raising risks from geographic concentration and potential market volatility.

Catalysts

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

• Although Befesa is poised to benefit from the global push for decarbonization and stricter environmental regulations, the company faces operational headwinds from continued weakness in core European industries-especially the automotive sector-which reduces demand for recycled aluminum and limits revenue growth in its secondary aluminum business.
  
• While ongoing industrialization and urbanization in markets like the US and Asia should provide a longer runway for steel dust waste volumes, persistent low steel production in China and Europe, combined with sluggish global economic growth, constrains overall input volumes in key regions and may cap future revenue expansion.
  
• Despite Befesa's expansionary investments in North America and the operational ramp-up at the Palmerton facility, the company's growth plan is now more geographically cautious, with Asian expansion on hold and volume improvements largely dependent on US steel demand resilience; this exposes Befesa to regional cyclical shocks and less diversified revenue streams over the medium term.
  
• While lower treatment charges for zinc and strategic hedging deliver a short-term tailwind for EBITDA and earnings in 2025, these benefits may prove transient, as smelter capacity cycles, commodity price volatility, and higher energy input costs (notably for electricity and natural gas in Europe) could compress net margins in future years if cost inflation outpaces operational efficiencies.
  
• Although technological improvements in refining and recycling are contributing to margin improvements, the company remains vulnerable to tightening regulations on waste processing, increased compliance costs, and heightened competition from new technological entrants-factors that could erode future EBITDA margins and earnings growth if not offset by further operational innovation.

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 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach €93.5 million (and earnings per share of €2.35) by about July 2028, up from €60.0 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 13.5x on those 2028 earnings, down from 17.7x today. This future PE is lower than the current PE for the DE Commercial Services industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.9%, as per the Simply Wall St company report.

Befesa Future Earnings Per Share Growth

Risks

• Weak demand in the European automotive industry and scarcity of aluminum scrap are compressing secondary aluminum margins, causing ongoing downward pressure on profitability and segment EBITDA, with management expecting further negative evolution throughout the year.
  
• High exposure to energy costs-especially electricity and natural gas in Europe-leaves Befesa vulnerable to rising operating expenses, which may reduce net margins if prices continue to trend upward as management anticipates for 2025.
  
• Stagnant or declining steel production in key markets such as Europe and China limits input volumes for recycling, constraining revenue growth and challenging Befesa's ability to drive higher plant utilization and earnings in those regions.
  
• The company's halted expansion plans in China reflect ongoing difficult market conditions and weak electric arc furnace steel production, highlighting geographic concentration risk and potential lack of growth momentum outside core regions; this could make long-term consolidated revenue more volatile.
  
• Heavy reliance on favorable zinc market conditions, including historically low treatment charges and robust hedging, exposes Befesa to future commodity price volatility and possible reversals in treatment charge trends, which would raise costs and negatively impact EBITDA and net income beyond 2025.

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 €1.3 billion, earnings will come to €93.5 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of €26.52, the bearish analyst price target of €28.0 is 5.3% 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.