Haynes Acquisition And Europa Plant Revamp Will Boost Future Market Expansion

Key Takeaways

• Completion of the Haynes acquisition and Bahru Stainless sale are poised to enhance future revenue, EBITDA, and net earnings through market expansion and accounting gains.
  
• A new business model, ESG practices, and low inventory levels promise increased operational efficiency, cost savings, and potential revenue growth in key markets.
  
• Seasonal slowdown, weak demand, and supply chain issues risk Acerinox's earnings and net margins; strategic sales and antitrust delays may impact long-term growth.

Catalysts

Manufactures, process, and markets stainless steel products in Spain, the United States, Africa, Asia, Rest of Europe, and internationally.

• The completion of the Haynes acquisition is expected in 2024, likely impacting future revenue growth by expanding in the high-performance alloys market, especially in aerospace, oil and gas, and chemical industries.
  
• The sale of Bahru Stainless is anticipated to significantly boost Q4 EBITDA through an accounting gain from the sale, positively affecting net earnings.
  
• The implementation of a new business model at the Acerinox Europa plant, following the resolution of a 5-month strike, aims to improve operational flexibility and efficiency, potentially increasing future net margins.
  
• Low inventory levels in key markets like the U.S. and Europe could lead to a rapid increase in demand once market conditions improve, enhancing revenue potential.
  
• Strong commitment to ESG practices and circular economy initiatives, such as increased recycling and energy efficiency enhancements, could lead to cost savings and improved net margins in the future.

Acerinox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acerinox's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 5.3% in 3 years time.
• Analysts expect earnings to reach €401.2 million (and earnings per share of €1.65) by about February 2028, up from €42.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €527 million in earnings, and the most bearish expecting €288.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, down from 59.8x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.44%, as per the Simply Wall St company report.

Acerinox Future Earnings Per Share Growth

Risks

• The seasonal slowdown affecting Acerinox's most profitable contributors in the fourth quarter could lead to lower adjusted EBITDA, impacting overall earnings.
  
• Weak demand in both the European and American markets has been highlighted, which could affect Acerinox's revenue and profitability if continued.
  
• Inventory increases and supply chain disruptions due to strikes and subsequent startup have led to temporary capital lock-up, impacting the company’s net margins and working capital management.
  
• The sale of Bahru Stainless, while financially positive in the short-term, indicates a strategic retreat from non-core business, potentially affecting long-term revenue growth.
  
• The lengthy antitrust approval process for the Haynes acquisition, especially in Europe, poses a risk to timely integration and realization of synergies, potentially delaying expected improvements in earnings.

Valuation

• The analysts have a consensus price target of €13.027 for Acerinox 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 €15.5, and the most bearish reporting a price target of just €9.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.6 billion, earnings will come to €401.2 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of €10.1, the analyst price target of €13.03 is 22.5% 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.