Renewing Operations And DNAe Will Streamline Supply Integration

Key Takeaways

• Simplifying operations and integrating supply units are expected to boost efficiency, cost competitiveness, and profitability through enhanced margin control.
  
• Strong growth in Services and Automation segments and new automation solutions signal robust revenue growth potential and market expansion.
  
• Stagnating growth, low market activity, strategic cost-cutting, and tariff uncertainties pose challenges to Valmet Oyj's profitability and future revenue potential.

Catalysts

Develops and supplies process technologies, automation, and services for the pulp, paper, and energy industries in North America, South America, China, Europe, the Middle East, Africa, and the Asia Pacific.

• Renewing the operating model is expected to simplify operations, enhance efficiency, and save €80 million annually by the beginning of 2026. This could result in improved net margins and overall profitability.
  
• Strong order growth in the Services and Automation segments, with organic growth rates of 8% and 12% respectively, suggests continued revenue growth potential, particularly as these areas represent a stable business with higher margins.
  
• The launch and subsequent orders for Valmet DNAe, which modernizes automation in sectors like energy, signals expansion into new markets and potential revenue growth from automation solutions.
  
• Integration of global supply units is intended to increase cost competitiveness and supply chain flexibility, allowing for improved management of demand fluctuations and better margin control.
  
• The strategy renewal aims to identify future growth opportunities and improve operational efficiency, which could enhance revenue growth and profitability, impacting earnings positively.

Valmet Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valmet Oyj's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 8.5% in 3 years time.
• Analysts expect earnings to reach €494.5 million (and earnings per share of €2.42) by about May 2028, up from €285.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €422 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the GB Machinery industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Valmet Oyj Future Earnings Per Share Growth

Risks

• The Process Technologies segment is experiencing low market activity, which has resulted in decreased net sales and a low EBITA margin of 1.5%. This could negatively impact the company's overall revenue and profitability if the trend continues.
  
• The company's organic growth in net sales and EBITA margins has plateaued, and an increase in capital employed has led to a decrease in ROCE. This stagnation could affect future earnings potential if not addressed effectively.
  
• Market conditions in the Process Technologies segment have been subdued, which, along with delayed customer decision-making in large projects due to global economic uncertainty, could adversely affect future orders and sales.
  
• The strategic renewal involves cost-cutting measures, including a potential reduction of up to 1,150 roles, which may have upfront costs and could impact net margins negatively until the full savings are realized by 2026.
  
• Tariff uncertainties, especially with the U.S., could affect cost structures and customer demand, potentially influencing revenues and net profitability if the company cannot effectively mitigate these through pricing strategies or supply chain adjustments.

Valuation

• The analysts have a consensus price target of €28.125 for Valmet Oyj 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 €32.0, and the most bearish reporting a price target of just €18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.8 billion, earnings will come to €494.5 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of €26.84, the analyst price target of €28.12 is 4.6% 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.