Focus On Higher-Margin Living Landscapes Will Shape Future Despite Market Risks

Key Takeaways

• Strategic focus on the Living Landscapes division and targeted acquisitions aim to enhance revenue through both organic and inorganic growth, improving margins and earnings.
  
• Investment in sustainable agricultural innovation and digital platforms aligns with regulatory demands, enhancing operational efficiencies and supporting long-term revenue growth and margin improvement.
  
• Currency fluctuations and challenges in Latin America, along with mixed performance and market dependencies in Europe, create pressures on earnings and growth strategies.

Catalysts

Provides agronomy services company in Ireland, the United Kingdom, Brazil, Poland, Romania, Latin America, and internationally.

• Origin Enterprises is focusing on expanding its higher-margin and less volatile Living Landscapes division, aiming to increase its contribution to operating profit from 20% currently to 30% by the end of 2026, potentially leading to improved overall operating margins and earnings.
  
• The company is leveraging its strong financial position and recent facility extension to continue pursuing strategic acquisitions in the Living Landscapes division, which should enhance revenue growth through inorganic expansion in addition to organic growth.
  
• The development and commercialization of new and sustainable agricultural products and services, like biostimulants and controlled release fertilizers, are expected to align with tightening environmental regulations, potentially driving revenue and improving net margins in the long term.
  
• The integration of new ERP and digital platforms is expected to enhance operational efficiencies and customer interactions, potentially leading to improved net margins and enhanced customer retention and sales, which will be reflected in future earnings.
  
• Strategic investments in R&D and human resources, particularly in areas aligned with market growth opportunities, are expected to drive the development of higher-margin products and services, potentially supporting margin expansion and revenue growth over the coming years.

Origin Enterprises Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Origin Enterprises's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.7% today to 2.5% in 3 years time.
• Analysts expect earnings to reach €61.0 million (and earnings per share of €0.49) by about March 2028, up from €55.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 5.9x today. This future PE is lower than the current PE for the GB Food industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Origin Enterprises Future Earnings Per Share Growth

Risks

• Currency fluctuations, particularly the depreciation of the Brazilian real against the euro, have negatively impacted profits in the Latin American segment, which could continue to pressure overall earnings if such trends persist.
  
• Challenges in credit profiles among large Latin American customers, such as AgroGalaxy filing for Chapter 11, and credit insurance withdrawals may limit revenue growth and require a shift in sales strategies.
  
• Mixed performance in Continental Europe, with differences in profitability trends between markets like Poland and Romania, could impact revenue if product mixes continue to lean towards lower-value, lower-margin items.
  
• Decreasing grain and oilseed prices have caused cautious spending on farms, potentially reducing demand for agricultural products and affecting revenue from farm-focused business segments.
  
• Earnings volatility in agriculture due to weather dependency and market challenges could disrupt profit consistency, despite attempts to mitigate through diversification into Living Landscapes.

Valuation

• The analysts have a consensus price target of €4.775 for Origin Enterprises 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 €5.4, and the most bearish reporting a price target of just €4.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.4 billion, earnings will come to €61.0 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 6.4%.
• Given the current share price of €3.08, the analyst price target of €4.77 is 35.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.