Declining Sugar Demand Will Hamper Core Operations Under EU Pressure

Key Takeaways

• Shifting consumer preferences and rising competition in alternative sweeteners are weakening Südzucker's core sugar business and eroding pricing power and market share.
  
• High fixed assets, regulatory pressures, and cost inflation are constraining flexibility, raising compliance costs, and placing long-term profitability under sustained downward pressure.
  
• Diversified non-sugar businesses, cost efficiencies, favorable regulations, and strong fruit segment performance enhance Südzucker's revenue stability and resilience amid sugar market volatility.

Catalysts

Produces and sells sugar products in Germany, rest of the European Union, the United Kingdom, the United States, and internationally.

• Südzucker's long-term revenue outlook is threatened by accelerating consumer trends toward low-sugar and sugar-free products, which will drive sustained declines in demand for its core sugar business and structurally weaken topline growth.
  
• The company's large asset base and persistent capital intensity dedicated to traditional sugar refining limit its flexibility to pivot into higher-growth specialty segments, raising the risk of asset impairments and continued downward pressure on return on invested capital for years to come.
  
• Heightened EU and global regulatory scrutiny-including the potential for more aggressive sugar taxes and stricter environmental standards-will increase compliance and operational costs, compressing net margins and forcing substantial new investments that dilute earnings growth.
  
• Intensifying competition from alternative sweeteners, bio-based chemicals, and innovative new entrants will reduce Südzucker's addressable market and threaten both pricing power and market share, further eroding future revenue streams.
  
• Despite ongoing cost-cutting programs, Südzucker has been unable to pass increased input and energy costs to customers in several divisions due to industry consolidation and customer bargaining power; if cost inflation continues to outpace pricing, gross margins and long-term profitability will remain fundamentally challenged.

Südzucker Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Südzucker compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Südzucker's revenue will grow by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.4% today to 2.7% in 3 years time.
• The bearish analysts expect earnings to reach €259.5 million (and earnings per share of €1.28) by about July 2028, up from €-222.0 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 8.7x on those 2028 earnings, up from -9.4x today. This future PE is lower than the current PE for the GB Food industry at 14.8x.
• 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 5.1%, as per the Simply Wall St company report.

Südzucker Future Earnings Per Share Growth

Risks

• Südzucker's non-sugar businesses, including fruit, specialty products, and bioethanol, now generate approximately 60% of group revenues and have demonstrated resilience and topline growth, positioning the company for greater revenue stability even if sugar market conditions remain volatile.
  
• Ongoing cost-saving programs and efficiency initiatives, targeting €200 million in savings over the next three to four years, are set to improve operating margins and net earnings, reducing the company's vulnerability to cyclical downturns in the sugar segment.
  
• EU sugar prices could see upward pressure due to reduced beet acreage in Europe (Südzucker's own acreage down 15%, Europe down 10%) and potential weather impacts, which may tighten supply and support medium-term revenue and gross margin improvement.
  
• New regulatory limits on cheap Ukrainian sugar imports and the EU's duty structure for other foreign imports mean that excess global supply may not fully translate into depressed EU sugar prices, protecting Südzucker's price levels and supporting EBITDA stability.
  
• The fruit segment, driven by high demand and improved margins, is outperforming expectations and could help offset weakness in other areas, underpinning group operating profit and providing a buffer to group earnings in adverse sugar or ethanol market environments.

Valuation

• The assumed bearish price target for Südzucker is €9.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Südzucker'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 €13.8, and the most bearish reporting a price target of just €9.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €9.6 billion, earnings will come to €259.5 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 5.1%.
  
• Given the current share price of €10.27, the bearish analyst price target of €9.5 is 8.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.