Major Arauco Project And Automation Expansion Set To Fuel Growth And Boost Profitability

Key Takeaways

• Strategic focus on increasing margins and restructuring aims to optimize costs and support long-term net margins and profitability.
  
• Diversification into automation and services offers reliable revenue streams and potential margin improvements, aided by significant acquisitions and projects.
  
• Slower market activity, declining process technology orders, and higher financial expenses may hinder Valmet's revenue growth and pressure profit margins.

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.

• The Arauco order will be booked in Q4 2024, significantly boosting future backlog and revenue from South America. This is expected to enhance future revenue streams in the process technology segment as this major project commences.
  
• An overall focus on increasing margins in stable business segments is noted, with a track record of growing margins over the past decade. This strategic focus could support improvements in net margins and profitability.
  
• The robust growth and potential for expansion in automation outside the pulp and paper industry, supported by the recent Analyzer Products and Integration acquisition, are expected to facilitate future revenue and margin improvements due to diversification.
  
• Continued expansion in the services segment, with record-high orders of €1.8 billion in the last 12 months, suggests a reliable revenue stream. The Arauco project offers additional long-term service and automation opportunities, potentially boosting future earnings.
  
• The company's strategic restructuring and efficiency improvements, such as reducing workforce in declining areas like the paper business line, aim to optimize costs and support net margins and earnings growth despite near-term challenges in certain sectors.

Valmet Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Valmet Oyj's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 7.3% in 3 years time.
• Analysts expect earnings to reach €427.9 million (and earnings per share of €2.32) by about December 2027, up from €285.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €481.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2027 earnings, up from 14.7x today. This future PE is lower than the current PE for the GB Machinery industry at 24.0x.
• 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 6.98%, as per the Simply Wall St company report.

Valmet Oyj Future Earnings Per Share Growth

Risks

• Valmet reported slower-than-expected market activity, which could lead to lower-than-anticipated revenues, impacting overall financial growth.
  
• The company's process technology orders are on a declining trend, which suggests potential challenges in sustaining revenue from this segment.
  
• Despite growth in service orders, they are still short of expectations, indicating that revenue from the service business may not grow as initially projected, affecting profitability.
  
• Certain markets, such as Europe and Asia Pacific, exhibit slower activity levels, posing a risk to revenue generation and potentially pressuring profit margins.
  
• Financial expenses are higher due to acquisitions, which could squeeze net earnings if cost structures are not optimized.

Valuation

• The analysts have a consensus price target of €29.56 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 €35.5, and the most bearish reporting a price target of just €21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €5.9 billion, earnings will come to €427.9 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €22.78, the analyst's price target of €29.56 is 22.9% 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.