Shift To High-Margin Fluff Pulp And Renewables Will Strengthen Future Prospects

Key Takeaways

• ENCE's shift to high-margin products and price increases in Europe's pulp market will enhance operating margins and boost revenue.
  
• Efficiency improvements and diversification into renewable solutions will drive earnings growth, reduce emissions, and support sustainable demand.
  
• Significant CapEx commitments and execution risks in new projects, coupled with regulatory challenges and potential pricing volatility, could pressure ENCE's financial performance and growth.

Catalysts

Produces and sells eucalyptus hardwood pulp and renewable energy in Spain, Germany, Poland, Italy, the Netherlands, the United Kingdom, Greece, Turkey, and internationally.

• ENCE's shift towards high-margin products like Fluff pulp and Ence Advanced pulp is anticipated to significantly improve operating margins, impacting EBITDA positively as Fluff pulp will provide an extra margin of around €60 per tonne.
  
• The expected increase in European pulp prices, driven by supply constraints and healthy demand from the tissue and packaging sectors, is likely to boost revenue and improve net margins.
  
• Ongoing efficiency improvements in the Pontevedra and Navia mills are set to reduce cash costs and scope 1 emissions, thus enhancing operating margins and EBITDA by €20 million in Pontevedra and €8 million in Navia.
  
• ENCE's diversification into renewable biomethane and biofertilizer production is poised to generate up to €60 million in EBITDA by 2030, supporting revenue and earnings growth through developing a portfolio of 28 projects.
  
• The development of renewable packaging solutions is expected to cater to consumer demand for sustainable alternatives, with a targeted return on capital employed exceeding 15%, thereby enhancing revenue and operating margins.

ENCE Energía y Celulosa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ENCE Energía y Celulosa's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 8.6% in 3 years time.
• Analysts expect earnings to reach €82.6 million (and earnings per share of €0.43) by about March 2028, up from €31.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €108 million in earnings, and the most bearish expecting €38.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, down from 25.5x today. This future PE is greater than the current PE for the GB Forestry industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 4.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.51%, as per the Simply Wall St company report.

ENCE Energía y Celulosa Future Earnings Per Share Growth

Risks

• The company's investment in new projects like the Fluff pulp line and the renewable packaging solutions, while promising, involve significant CapEx commitments (e.g., €30 million in 2024/2025 for Fluff pulp), which could pressure cash flow and leverage if the anticipated returns are delayed or lower than expected. This could impact net margins and earnings.
  
• The pulp business has faced temporary cost increases related to energy supply issues and chemical costs, which, if persistent, could affect operating margins despite current reduction efforts. This could impact the stability of earnings and net margins.
  
• The lag in decision-making and implementation for projects like the Pontevedra Avanza project indicates potential execution risks and delays in deriving expected efficiencies and cost reductions. This uncertainty could weigh on future revenue growth and EBITDA improvements.
  
• The expected growth in the biomethane and biofertilizer segment is subject to regulatory and permitting complexities, which could slow down the project timeline and delay revenue contributions, affecting overall revenue projections and EBITDA targets.
  
• The pulp and paper industry is currently experiencing a favorable pricing environment, partly due to global supply disruptions. However, any recovery in global supply or reduced demand could depress pulp prices, impacting revenue growth and profitability.

Valuation

• The analysts have a consensus price target of €4.094 for ENCE Energía y Celulosa 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 €4.7, and the most bearish reporting a price target of just €3.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €964.1 million, earnings will come to €82.6 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 14.5%.
• Given the current share price of €3.31, the analyst price target of €4.09 is 19.0% 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.