New ERP System And Uzbekistan Agreement Will Improve Mining Operations By 2026

Key Takeaways

• New ERP system and strategic cooperation in Uzbekistan expected to boost revenues and improve order execution for key products.
  
• Transformation towards leaner operations and higher-margin service revenues anticipated to enhance profitability and earnings.
  
• Uncertainty in capital market activity and project investment timing, along with restructuring costs, could constrain FLSmidth's near-term revenue growth and profitability.

Catalysts

Provides flowsheet technology and service solutions for the mining and cement industries in North America, South America, Europe, North and Sub-Saharan Africa, the Middle East, Central and South Asia, the Asia Pacific, and Australia.

• The implementation of a new ERP system in FLSmidth’s largest production facility in Arizona is expected to improve order execution for pumps and cyclones, leading to increased revenues as operations are now back on track.
  
• The strategic cooperation agreement in Uzbekistan, which is one of the largest agreements FLSmidth has signed, is expected to significantly boost future revenues due to the company supplying 80% of the flow sheet for mining investments in the country.
  
• The study work being conducted by EPCM companies is likely to result in significant CapEx investment by late 2025 or 2026. This anticipated investment could lead to increased order intake and revenues for FLSmidth’s mining segment.
  
• The transition to a leaner operating model is expected to reduce SG&A costs over the next year, positively impacting net margins and supporting profitability improvements.
  
• The ongoing transformation of FLSmidth's operations and a focus on increasing the share of higher-margin service revenues relative to capital revenues are anticipated to enhance overall profitability and earnings for the company.

FLSmidth Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FLSmidth's revenue will decrease by -1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 8.3% in 3 years time.
• Analysts expect earnings to reach DKK 1.7 billion (and earnings per share of DKK 29.21) by about January 2028, up from DKK 837.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as DKK1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, down from 25.3x today. This future PE is lower than the current PE for the GB Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.58%, as per the Simply Wall St company report.

FLSmidth Future Earnings Per Share Growth

Risks

• The capital market activity is expected to remain subdued until late 2025, potentially impacting FLSmidth's order intake and revenue growth in the near term.
  
• The timing of increased CapEx investments and mining project orders is uncertain, which could delay expected revenue increases until 2026 or later.
  
• Risk-averse behavior in capital projects and divestments, especially in the Cement business, might limit growth opportunities and revenue from new orders.
  
• The transition away from basic labor services reduces order intake from that segment, adversely affecting short-term revenue streams.
  
• The complex restructuring and transformation process, including provision and SG&A cost management, could incur ongoing costs and impact net margins and profitability targets.

Valuation

• The analysts have a consensus price target of DKK416.5 for FLSmidth 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 DKK475.0, and the most bearish reporting a price target of just DKK315.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK20.1 billion, earnings will come to DKK1.7 billion, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 5.6%.
• Given the current share price of DKK373.0, the analyst's price target of DKK416.5 is 10.4% 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.