Submerged Technology And Sustainable Feed Will Optimize Future Operations

Key Takeaways

• Investment in new technology and sustainability initiatives is expected to enhance operational efficiency, reduce costs, and improve margins.
  
• Expansion in value chain and farming volume growth aims to boost revenue and profitability through better capacity utilization and strategic positioning.
  
• Lower fish prices, high farming costs, reduced quotas, rising debt, and litigation risks could pressure margins and constrain Lerøy Seafood Group's profitability.

Catalysts

Produces, processes, markets, sells, and distributes seafood products worldwide.

• Lerøy Seafood Group's investment in new technology, such as shielding and submerged technology, is expected to improve operational efficiency and significantly reduce costs, impacting net margins positively in the future.
  
• The anticipated increase in harvest volumes due to strong biological performance and better fish health, such as reduced mortality and fewer lice treatments, is likely to drive revenue growth.
  
• The focus on sustainability and innovative feed solutions, like using European chicken byproducts, is expected to reduce emissions and possibly improve margins through cost efficiencies and better market positioning.
  
• The strategic expansion in Lerøy's value chain and improvements in the VAP, Sales & Distribution segment could enhance profitability and operational earnings as capacity utilization becomes more optimal.
  
• The goal to increase farming volume by nearly 30,000 tonnes by 2025 aligns with Lerøy's broader growth strategy, supporting potential revenue gains and improved earnings.

Lerøy Seafood Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lerøy Seafood Group's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 10.7% in 3 years time.
• Analysts expect earnings to reach NOK 3.8 billion (and earnings per share of NOK 6.43) by about March 2028, up from NOK 2.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK4.6 billion in earnings, and the most bearish expecting NOK3.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the GB Food industry at 21.0x.
• 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 5.94%, as per the Simply Wall St company report.

Lerøy Seafood Group Future Earnings Per Share Growth

Risks

• Prices for salmon and trout are below last year's levels, which could continue to pressure margins despite improved biological performance. This could negatively impact revenue and net margins.
  
• A significant quota reduction in Wild Catch, particularly for cod, could limit catch volumes and constrain revenue growth in this segment.
  
• High costs in farming regions due to low harvest weights and increased feed costs may lead to higher operational expenses, potentially impacting net earnings.
  
• The increase in net interest-bearing debt, driven by capital-intensive investments in submerged technologies and other improvements, could affect financial flexibility and raise interest expenses, impacting net profits.
  
• Ongoing litigation costs related to the competition case with the EU could result in unforeseen legal expenses, impacting overall net margins and profitability.

Valuation

• The analysts have a consensus price target of NOK61.833 for Lerøy Seafood Group 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 NOK69.0, and the most bearish reporting a price target of just NOK54.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK35.8 billion, earnings will come to NOK3.8 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 5.9%.
• Given the current share price of NOK51.1, the analyst price target of NOK61.83 is 17.4% 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.