Refractory Efficiency And Environmental Services Expansion Will Drive Stronger Long Term Earnings Power

Catalysts

About Borgestad

Borgestad is an industrial investment company focused on commercial real estate and refractory businesses in niche markets where it can drive operational improvements.

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

• Continued optimization of Agora Bytom through higher occupancy, conversion of common areas to leasable space and replacement of low-rent tenants with stronger concepts is expected to lift rental income and stabilize cash flow, supporting revenue growth and EBITDA.
• Improving EBIT margins at Hoganas Borgestad, driven by cost-cutting, avoidance of low-margin projects and organizational changes in Sweden, indicate rising operational efficiency that can translate into structurally higher group EBIT and earnings.
• Growing maintenance and service needs in high temperature industries such as steel, cement and pulp and paper, combined with Hoganas Borgestad’s leading Nordic position, are expected to support resilient order backlogs and higher utilization, underpinning revenue and margin expansion.
• The acquisition and integration of Emcothech, with expansion into flue gas cleaning in Sweden and Finland, position the group to benefit from tightening environmental requirements, which can add new revenue streams and enhance overall net margins.
• Expected execution of the Bjuf sale leaseback and a future divestment of Agora Bytom, combined with disciplined capital allocation and dividend potential, may unlock asset values, reduce net debt and improve return on equity and earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Borgestad's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 20.5% in 3 years time.
• Analysts expect earnings to reach NOK 259.0 million (and earnings per share of NOK 6.8) by about December 2028, up from NOK 13.8 million today.
• 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 4.2x on those 2028 earnings, down from 45.0x today. This future PE is lower than the current PE for the NO Basic Materials industry at 45.0x.
• 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 8.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The refractory business is highly exposed to cyclical heavy industry in Europe, and management notes that European and Nordic industry is currently in a low cycle with customers imposing strict cost cutting and showing high price sensitivity. A prolonged or deeper downturn in steel, cement and pulp and paper could suppress project volumes and pricing power, weighing on revenue and EBIT margins.
• Hoganas Borgestad relies on a very seasonal maintenance cycle that peaks in the third quarter and uses subcontractors and temporary resources to manage capacity. If customers change maintenance patterns or postpone shutdowns to save costs, this could disrupt seasonality, leave resources underutilized and increase unit costs, damaging earnings stability and EBIT margins.
• Borgestad’s strategy assumes it can continue to optimize and eventually divest Agora Bytom at attractive terms. Yet management already highlights a weak transaction market for Polish shopping centers and Agora has high occupancy near 97 percent, which limits easy upside from further leasing. A structurally soft retail real estate market in Poland could cap rent growth, pressure valuations and constrain revenue and net margins from the property segment.
• The group’s balance sheet remains sensitive to interest rates and currency movements, as seen in higher interest hedging costs from mid 2024. A stronger NOK against the euro reduces the reported book value of Agora, and elevated or volatile interest and hedging costs in Poland and Sweden could erode net financial results and compress earnings even if operating performance remains solid.
• The path to higher profitability leans on ongoing cost cutting, organizational changes in underperforming Swedish subsidiaries and successful integration of acquisitions such as Emcothech. Any setbacks in executing restructuring, realizing synergies or expanding into new geographies like Finland could stall the climb towards the 10 percent EBIT margin target and limit group earnings growth.

Valuation

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

• The analysts have a consensus price target of NOK24.0 for Borgestad 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 NOK1.3 billion, earnings will come to NOK259.0 million, and it would be trading on a PE ratio of 4.2x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of NOK17.75, the analyst price target of NOK24.0 is 26.0% 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.