Shifting To High-Margin Mining Services And Divesting The Cement Business Will Strengthen Future Prospects

Key Takeaways

• By focusing on high-margin service contracts and selling non-core assets, FLSmidth aims to enhance revenue stability and improve net margins.
  
• Operational efficiency is set to improve through streamlined operations and global service centers, while mining sector innovations bolster market share and customer engagement.
  
• Geopolitical and supply chain challenges, divestment uncertainties, and competitive pricing pressure may impact FLSmidth's margins and earnings despite operational improvements.

Catalysts

Provides flowsheet technology and service solutions for the mining and cement industries in Denmark, the United States of America, Canada, Chile, Brazil, Peru, Australia, North and South America, Europe, the Middle East, Africa, and Asia.

• FLSmidth's focus on growing its service business, notably with the HPGR technology and pumps, is expected to increase revenue stability and potentially improve net margins by maintaining a higher share of predictable, high-margin service contracts versus lower-margin product sales.
  
• The completion of the cement business sale and cessation of non-core activities are poised to improve the company's net margins by shedding low-margin, loss-making projects, and further concentrating efforts on more profitable segments.
  
• The company's ongoing transformation, which includes streamlining operations and shifting support functions to global business service centers, is expected to reduce SG&A expenses, thereby improving overall net margins and operational efficiency.
  
• Advancements in supply chain optimization, new market expansion opportunities, and product innovation initiatives, particularly within the mining sector, are positioned to support revenue growth by capturing more market share and deepening customer engagement.
  
• The expectation of a stable mining service business despite deflationary pressures on heavy capital equipment prices suggests an ability to maintain or potentially increase their gross margins through strategic procurement savings and higher service attachment rates.

FLSmidth Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FLSmidth's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 8.5% in 3 years time.
• Analysts expect earnings to reach DKK 1.7 billion (and earnings per share of DKK 30.35) by about April 2028, up from DKK 1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the GB Machinery industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.79%, as per the Simply Wall St company report.

FLSmidth Future Earnings Per Share Growth

Risks

• Geopolitical dynamics and supply chain volatility present ongoing challenges, potentially impacting efficiency and reliability, which could affect revenue and net margins.
  
• The intended divestment of the Cement business indicates an area of uncertainty, where delays or unfavorable sale conditions could impact earnings.
  
• Persistent deflation in heavy capital equipment due to intense competition pressures could reduce margins unless effectively offset by procurement savings.
  
• High price competition and the resulting reduction in heavy capital equipment prices suggest possible revenue pressure.
  
• The transformation and separation costs projected for 2025, with potential continuation into 2026, may weigh on net earnings despite overall operational improvements.

Valuation

• The analysts have a consensus price target of DKK401.3 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 DKK313.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK20.2 billion, earnings will come to DKK1.7 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of DKK293.4, the analyst price target of DKK401.3 is 26.9% 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.