Electrification And Energy Transition Demand Will Support Stronger Long Term Earnings

Catalysts

About EuroGroup Laminations

EuroGroup Laminations designs and manufactures high performance motor and generator laminations for e mobility and industrial applications worldwide.

What are the underlying business or industry changes driving this perspective?

• Accelerating electrification in Europe and Asia, especially the rapid expansion of electric and hybrid vehicles in China and continued growth in European mobility, should gradually offset current North American weakness and restore higher top line growth.
• Structural growth in energy transition applications such as industrial motors, heat pumps and transformers, supported by the consolidation of the Indian business, is broadening the revenue base beyond autos and should support more resilient revenues and EBITDA through cycles.
• The global operational excellence and cost saving program, already piloted in Italy and Mexico and set for rollout in China, targets more than EUR 10 million annual savings. This should lift EBITDA margin back toward and above the 13% medium term level and enhance earnings quality.
• Improved supply chain governance and longer term raw material contracts from Far East suppliers, together with AI enabled demand forecasting, are expected to reduce working capital swings and scrap, improving free cash flow generation and net margin stability.
• Ongoing capacity optimization, higher overall equipment effectiveness and leveraging past CapEx, particularly in the E mobility segment, should allow the company to convert a stable EUR 2.5 billion pipeline into revenues with lower incremental capital needs. This would support higher return on capital employed and earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming EuroGroup Laminations's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.7% in 3 years time.
• Analysts expect earnings to reach €43.4 million (and earnings per share of €0.3) by about December 2028, up from €15.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €68.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 33.8x today. This future PE is greater than the current PE for the IT Electrical industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent tariff and policy uncertainty in North America, such as higher duties on non U.S. steel and removal of BEV tax credits, could structurally weaken demand for electric vehicles in the USMCA region and keep E mobility revenues below expectations, putting pressure on group revenue and earnings growth.
• Intensifying competition from Asian manufacturers in Europe and continued double digit EV market growth in China may compress pricing power for EuroGroup Laminations, leading to lower realized prices and limiting the recovery of EBITDA margin and net margin.
• Extended lead times and dependence on raw materials sourced from the Far East, combined with elevated inventories in Mexico, could make working capital swings a recurring issue, constraining free cash flow generation and increasing net debt and leverage.
• Higher depreciation and amortization from past capacity investments, if not matched by the updated slower revenue trajectory and a reduced midterm growth outlook, could cap improvements in EBIT margin and return on capital employed, limiting upside to earnings and valuation.
• The reduction of the EV order book in North America by approximately EUR 400 million, despite a stable EUR 2.5 billion pipeline, suggests that project deferrals or cancellations could persist, which would undermine visibility on long term revenue growth and delay any meaningful expansion in net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €3.85 for EuroGroup Laminations based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €43.4 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 17.3%.
  
• Given the current share price of €3.2, the analyst price target of €3.85 is 17.0% 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.