Expanding Harvest Volumes And Sustainable Practices Will Drive Earnings Growth

Key Takeaways

• Expansion in freshwater operations and transition to larger smolt may improve revenue and reduce costs through efficient production and operations.
  
• Decrease in fish oil prices and diversification in market presence could enhance operating margins and stabilize revenue growth.
  
• Market pressure from increased salmon volumes and operational challenges could negatively impact revenue, profit margins, and future earnings.

Catalysts

Produces and sells salmon products in North America, Western Europe, Eastern Europe, Asia, and internationally.

• Bakkafrost has been ramping up its freshwater operations in the Faroe Islands, increasing capacity by 50% with the potential for further growth. The robust biological performance and increased stocking rates could improve the future revenue through higher production and sales volumes.
  
• The transition to larger, healthier smolt in Scotland is expected to lower mortality rates and improve survivability, potentially reducing costs and increasing net margins due to more efficient operations and better yield per fish.
  
• The significant decrease in fish oil prices is anticipated to lower feed costs, which should positively impact operating margins by reducing input costs for the farming segment gradually over the next year.
  
• Continued strategic focus on the U.S. and European markets, with Norway supplying more salmon to China and other growth regions, could stabilize and potentially increase future revenues and sales due to diversified market presence.
  
• Planned increase in harvest volumes to 100,000 tonnes by 2025, along with good biological performance and transition to sustainable operations, suggests potential growth in earnings driven by scale efficiencies and improved market dynamics.

P/F Bakkafrost Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming P/F Bakkafrost's revenue will grow by 15.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 25.5% in 3 years time.
• Analysts expect earnings to reach DKK 3.0 billion (and earnings per share of DKK 49.74) by about January 2028, up from DKK 569.2 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 17.0x on those 2028 earnings, down from 41.7x today. This future PE is lower than the current PE for the GB Food industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.67%, as per the Simply Wall St company report.

P/F Bakkafrost Future Earnings Per Share Growth

Risks

• The revenue and operational EBIT for the third quarter were lower compared to the same period last year, indicating challenges in maintaining growth, which could impact future earnings.
  
• Significant reduction in marine raw material sourcing and external sales of fish oil and fish meal suggests possible future supply chain or sourcing issues that could affect input costs and profitability.
  
• The market has faced pressure due to larger salmon volumes from other regions such as Norway, driving down prices, which could negatively impact revenue and profit margins.
  
• Negative financial impacts from operational EBIT due to factors like ISA incidents and biological challenges highlight ongoing operational risks that may affect net margins.
  
• Fluctuating feed prices and the potential for increased costs could affect the farming segment profitability, influenced by changing marine ingredient prices, impacting net earnings.

Valuation

• The analysts have a consensus price target of DKK 723.69 for P/F Bakkafrost 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 DKK 793.94, and the most bearish reporting a price target of just DKK 635.31.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK 11.6 billion, earnings will come to DKK 3.0 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 5.7%.
• Given the current share price of DKK 634.0, the analyst's price target of DKK 723.69 is 12.4% 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.