Simplified Operations Will Enable Reinvestment In The Bakery Industry

Key Takeaways

• Enhanced cash conversion and organizational simplification are expected to boost cash flow, net margins, and earnings, enabling reinvestment or additional dividends.
  
• Streamlined operations and strong performance in the bakery segment aim to drive revenue and margin expansion through efficiencies and strategic growth platforms.
  
• Operational and market challenges could impact Orkla's financial stability and margins, especially in confectionery and snacks, amid high cocoa costs and regulatory uncertainties.

Catalysts

Engages in branded consumer goods, and industrial and financial investment businesses.

• Orkla’s new operating model emphasizes enhanced cash conversion, resulting in a 112% cash conversion on a rolling 12-month basis. If this trend continues, it will positively impact cash flow and enable additional dividends or reinvestment, potentially boosting earnings.
  
• The planned full implementation of the redesigned operating model by early next year is expected to create efficiencies and cost reductions, enhancing net margins across portfolio companies in future periods.
  
• An organizational simplification strategy is underway, expected to streamline operations and reduce costs within Orkla ASA, potentially increasing net margins and earnings.
  
• Orkla Food Ingredients’ strong performance in the Bakery segment and potential strategic partnerships or growth platforms are poised to drive revenue and margin expansion over the strategy period.
  
• Stabilizing raw material prices, excluding cocoa, may lead to improved cost management and margin strengthening, positively impacting Orkla’s earnings in the future.

Orkla Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orkla's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 9.8% in 3 years time.
• Analysts expect earnings to reach NOK 7.4 billion (and earnings per share of NOK 7.41) by about December 2027, up from NOK 5.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, down from 17.2x today. This future PE is lower than the current PE for the GB Food industry at 20.5x.
• 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 5.67%, as per the Simply Wall St company report.

Orkla Future Earnings Per Share Growth

Risks

• The significant NOK 741 million in write-downs, including impairments of Orkla Confectionery & Snacks and NIC Germany, highlight ongoing challenges with some business units, potentially impacting net margins and earnings.
  
• Continued high cocoa prices, while partially mitigated, are expected to pressure the confectionery segment's margins, potentially affecting overall profitability.
  
• The hydro power sales process involves regulatory uncertainties and potential impacts on Orkla's financial stability, which could disrupt cash flows and capital structure.
  
• Operational challenges at Orkla Confectionery & Snacks could delay improvements in EBIT growth, especially if issues persist beyond Q3.
  
• Sluggish consumer sentiment in various markets, coupled with weak purchasing power and competition from private labels, could constrain future revenue growth.

Valuation

• The analysts have a consensus price target of NOK 99.5 for Orkla 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 NOK 115.0, and the most bearish reporting a price target of just NOK 84.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NOK 75.4 billion, earnings will come to NOK 7.4 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 5.7%.
• Given the current share price of NOK 98.05, the analyst's price target of NOK 99.5 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.