Heavy Project Exposure And Cost Pressures Will Limit Benefits Of Higher Value Added Shift

Catalysts

About Klöckner & Co

Klöckner & Co is a metals distributor and processor with operations in North America and Europe that focuses on higher value added processing and service center activities.

What are the underlying business or industry changes driving this perspective?

• Heavy emphasis on large energy, renewable power and power transmission projects concentrates exposure in segments that currently show strong activity. Any slowdown in project awards or policy support could pull back volumes and pressure revenue.
• Plans to benefit from rising defense and shipbuilding demand in Europe rely on timely government spending and contract execution. Delays or scale backs in defense budgets would limit the expected uplift for earnings.
• The pivot toward higher value added and service center business reduces reliance on steel price swings. However, it also increases sensitivity to industrial production and fabrication demand, so a prolonged period of weak manufacturing could restrain margin expansion and EBITDA.
• Ongoing divestments of lower margin distribution assets and reallocation of capital into processing sites raise the bar for returns on these investments. If new or upgraded sites do not reach expected utilization, net margins and cash generation could disappoint.
• Rising personnel and transportation costs, together with restructuring expenses linked to portfolio changes, suggest that any further cost inflation or execution hiccups could erode the current gross profit margin gains and hold back net earnings.

Assumptions

This narrative explores a more pessimistic perspective on Klöckner & Co compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Klöckner & Co's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.0% today to 1.4% in 3 years time.
• The bearish analysts expect earnings to reach €97.1 million (and earnings per share of €0.99) by about January 2029, up from €-130.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €184.4 million.
• 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 8.4x on those 2029 earnings, up from -6.2x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 16.0x.
• The bearish analysts expect the number of shares outstanding to grow by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is pushing hard into higher value added processing and service center activities, with these areas accounting for 81% of sales in the first 9 months of 2025 and potentially 87% if the divested U.S. sites are excluded. This shift could support more resilient revenue and a steadier gross profit margin over time.
• Record 3 quarter shipments in the Americas, with third quarter year over year shipment growth of more than 6% excluding discontinued operations while industry service center shipments declined, suggest ongoing market share gains. These gains may continue to support volumes and EBITDA even if broader steel demand is flat.
• Growing exposure to long duration end markets such as large energy projects, renewable power, power transmission and defense and shipbuilding in both North America and Europe could provide multi year project visibility. This may support revenue and earnings through different industry cycles.
• The focus on automation and digitalization, including an 8.9% year over year increase in digital quotes in the first 9 months of 2025, together with portfolio pruning of lower margin distribution assets, may gradually improve cost efficiency and net margins across the cycle.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Klöckner & Co is €6.15, which represents up to two standard deviations below the consensus price target of €8.04. This valuation is based on what can be assumed as the expectations of Klöckner & Co'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 €10.0, and the most bearish reporting a price target of just €6.15.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €7.2 billion, earnings will come to €97.1 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €8.18, the analyst price target of €6.15 is 33.0% lower. Despite analysts expecting the underlying business 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.