Cost Optimization And New Investments Will Strengthen Precision Agriculture And Energy Segments

Key Takeaways

• Cost optimization and strategic asset divestments aim to enhance net margins and balance sheet health, reducing leverage and interest expenses.
  
• Growth investments and innovation in segments like Precision Agriculture and Fluor & Energy Materials aim to stabilize and enhance revenues and profitability.
  
• Orbia faces financial challenges with decreased revenues and EBITDA, increased leverage, and adverse market conditions potentially impacting future earnings and revenue growth.

Catalysts

Orbia Advance Corporation, S.A.B. de C.V.

• Orbia is actively executing a cost optimization program, expected to generate $250 million in annual savings by 2027, positively impacting net margins due to reduced SG&A and manufacturing costs.
  
• The company is realizing benefits from recently completed growth investments and plans to optimize its financial position by reducing capital expenditures, which could improve earnings accuracy and operational profitability.
  
• Strategic focus on divesting noncore assets will generate cash to reduce leverage, enhancing the company's balance sheet health and potentially improving earnings due to lower interest expenses.
  
• There is a significant expected improvement in profitability for the Precision Agriculture segment rooted in cost-saving initiatives, digital farming solutions, and new project developments, likely boosting segment revenues.
  
• The Fluor & Energy Materials segment is poised to benefit from cost control measures and growth investments in next-generation refrigerants and battery materials, which are anticipated to stabilize and subsequently grow margins and revenues in the medium to long term.

Orbia Advance Corporation. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orbia Advance Corporation. de's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.9% in 3 years time.
• Analysts expect earnings to reach $239.9 million (and earnings per share of $0.12) by about March 2028, up from $145.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $277 million in earnings, and the most bearish expecting $202.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.9x on those 2028 earnings, up from 10.3x today. This future PE is greater than the current PE for the MX Chemicals industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.96%, as per the Simply Wall St company report.

Orbia Advance Corporation. de Future Earnings Per Share Growth

Risks

• Orbia's revenues decreased by 9% for the full year, and EBITDA dropped 25%, indicating significant financial challenges that could affect future earnings if persistent.
  
• The net debt-to-EBITDA ratio increased to 3.30x from 2.35x year-over-year, reflecting increased leverage and potential risks to net margins if interest rates impact interest expenses further.
  
• Ongoing sluggish economic conditions, higher interest rates, and political factors led to lower construction and infrastructure activity, affecting demand and potentially impacting revenue growth negatively.
  
• The company faces a challenging pricing environment due to market dynamics such as excess supply, especially from China and the U.S., which may pressure net margins in the future.
  
• Weak market conditions in key sectors like Connectivity Solutions and Building & Infrastructure, combined with lower expectations for market recovery in 2025, indicate potential risks to revenue stabilization and growth.

Valuation

• The analysts have a consensus price target of MX$32.12 for Orbia Advance Corporation. de 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 MX$85.49, and the most bearish reporting a price target of just MX$15.69.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.3 billion, earnings will come to $239.9 million, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 22.0%.
• Given the current share price of MX$15.63, the analyst price target of MX$32.12 is 51.3% 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.