Investment In Clean Energy And Healthcare Sectors Will Strengthen Future Prospects

Key Takeaways

• The accelerated restructuring program, capital expenditure, and share buyback are poised to enhance profitability, operating margins, and earnings per share.
  
• Anticipated growth in semiconductor and clean energy sectors should drive future revenues and improve cash flow through enhanced working capital management.
  
• Weaker semiconductor market conditions and decreased demand in electric vehicles, combined with restructuring costs and currency risks, may hinder Morgan's revenue growth and profitability.

Catalysts

Operates as a materials science and application engineering company primarily the United Kingdom.

• The accelerated restructuring program is expected to deliver £27 million in annualized savings by 2026, which will help to improve operating margins and profitability.
  
• Investment in capacity for core and faster-growing markets, with gross capital expenditure of £90 million in 2024, is projected to bolster future revenues in sectors like clean energy and healthcare.
  
• The company anticipates a return to growth in the semiconductor market by 2026, following a temporary slowdown, which should positively impact revenues and margins as demand for its consumables in silicon carbide power electronics increases.
  
• A £40 million share buyback program reflects strong balance sheet management and the absence of M&A, which is likely to enhance earnings per share (EPS) in the coming years.
  
• Enhanced working capital management has led to improved cash conversion, which, alongside ongoing efficiency improvement activities, is expected to support higher free cash flow and profitability improvements in the future.

Morgan Advanced Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Morgan Advanced Materials's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 7.8% in 3 years time.
• Analysts expect earnings to reach £89.0 million (and earnings per share of £0.31) by about March 2028, up from £50.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 11.9x today. This future PE is lower than the current PE for the GB Machinery industry at 20.8x.
• 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 9.32%, as per the Simply Wall St company report.

Morgan Advanced Materials Future Earnings Per Share Growth

Risks

• Weaker semiconductor market conditions, particularly in silicon carbide power electronics, led to a 10% revenue decline in the second half of 2024. This may impact overall revenue growth.
  
• Slower-than-expected growth in electric vehicle sales has led to an overproduction of wafers and reduced demand for Morgan's semiconductor consumables, potentially affecting future revenue projections.
  
• Negative foreign exchange impacts reduced adjusted operating profit by £10.1 million, highlighting the risk of currency fluctuations on profitability.
  
• Significant restructuring costs of £45 million to achieve £27 million in annual savings by 2026 could impact net margins and lead to increased risk if market conditions worsen further.
  
• The semiconductor capacity investment program has been scaled back from £100 million to £60 million, indicating potential challenges in achieving projected returns and earnings from this segment.

Valuation

• The analysts have a consensus price target of £3.15 for Morgan Advanced Materials 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 £3.6, and the most bearish reporting a price target of just £2.65.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.1 billion, earnings will come to £89.0 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of £2.12, the analyst price target of £3.15 is 32.5% 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.