European Expansion And Focus On Healthy Beverages Will Create New Opportunities

Key Takeaways

• Expansion in Northern and Western Europe, alongside acquisitions, is set to boost revenue through operational efficiency and growth opportunities.
  
• Focus on healthy beverages and share buybacks, supported by strong cash flow, aims to enhance EPS and leverage market trends.
  
• Limited growth in mature markets, high logistic costs, and integration expenses may pressure Royal Unibrew's margins and earnings potential.

Catalysts

Provides beer, soft drinks, malt beverages, energy drinks, cider/ready to drink, juice, water, and wine and spirits.

• Expansion of the multi-beverage platform in Northern and Western Europe, including full coverage in the Nordics and the Baltics, opens up growth opportunities, likely positively impacting future revenue.
  
• Significant investments in capacity and capabilities, along with several acquisitions, provide a foundation for operational efficiency improvements and potential revenue and earnings growth.
  
• Focus on efficiency and reducing complexity, particularly through synergies from acquisitions, is expected to boost net margins by offsetting promotional pressures and adverse channel mix impacts.
  
• The relaunch of a share buyback program, facilitated by strong free cash flow and reduced financial gearing, is anticipated to enhance earnings per share (EPS).
  
• Emphasis on high-growth categories like enhanced and low-sugar beverages, as well as innovation in sports drinks, aligns with market trends towards healthier products and is expected to drive future revenue growth.

Royal Unibrew Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Royal Unibrew's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 10.6% in 3 years time.
• Analysts expect earnings to reach DKK 1.8 billion (and earnings per share of DKK 37.17) by about March 2028, up from DKK 1.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as DKK2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 18.8x today. This future PE is greater than the current PE for the GB Beverage industry at 17.1x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.74%, as per the Simply Wall St company report.

Royal Unibrew Future Earnings Per Share Growth

Risks

• The European beverage market is not growing by volume, and channel mix pressures, along with promotional strain, may limit margin improvements, potentially affecting future net margins and earnings.
  
• The company's expansion in Northern Europe is seeing limited growth due to already strong market positions, making further revenue growth challenging.
  
• Although Western Europe and International have shown growth, the company faces significant logistic costs and supply chain complexities, which could impact net margins.
  
• The market for no-low alcohol beverages is not showing strong enough growth prospects, which might not favorably impact revenue or earnings if overinvestment occurs in this category.
  
• The integration costs and market reinvestment in new acquisitions like the Minttu brands and the Pernod Ricard in Finland are expected to dilute margins, impacting EBIT and earnings growth in 2025.

Valuation

• The analysts have a consensus price target of DKK605.3 for Royal Unibrew 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 DKK690.0, and the most bearish reporting a price target of just DKK460.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK17.1 billion, earnings will come to DKK1.8 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 4.7%.
• Given the current share price of DKK551.0, the analyst price target of DKK605.3 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.