BioSolutions Expansion And Environmental Initiatives Will Benefit Future Operations

Key Takeaways

• Focus on high-value products and specialization in BioSolutions and BioMaterials aims to improve product mix and enhance net margins.
  
• Environmental investments, like air preheater technology, aim to cut energy costs and CO2 emissions, boosting future net margins.
  
• Rising wood costs, competitive pressures in biovanillin, and environmental liabilities could challenge Borregaard's margins and revenue growth amidst uncertain market conditions.

Catalysts

Engages in the development, production, and marketing of specialized biomaterials and biochemicals in Norway, rest of Europe, the United States, Asia, and internationally.

• Borregaard is expecting a significant increase in sales volume in BioSolutions driven by agriculture and industrial applications, which is likely to impact revenue positively in the future.
  
• The company's increasing focus on specialization and high-value products across BioSolutions and BioMaterials is aimed at improving product mix and margins, potentially enhancing net margins and earnings over time.
  
• Investment in environmentally-focused projects, such as the air preheater technology in the bio-boiler, promises to reduce energy costs and CO2 emissions, possibly improving net margins in the long run.
  
• Antidumping duties on synthetic vanillin from China, although uncertain, could favorably affect Borregaard's pricing and competitive position in its Biovanillin segment, potentially impacting revenue if supply conditions stabilize.
  
• The full year impact of completed energy and CO2 investments, including the electrification of spray dryers, is expected to reduce costs in 2025, thereby positively influencing net margins and earnings in the year.

Borregaard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Borregaard's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 13.6% in 3 years time.
• Analysts expect earnings to reach NOK 1.3 billion (and earnings per share of NOK 12.68) by about February 2028, up from NOK 823.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK1.4 billion in earnings, and the most bearish expecting NOK1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 24.6x today. This future PE is lower than the current PE for the GB Chemicals industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Borregaard Future Earnings Per Share Growth

Risks

• Borregaard experienced higher wood costs, which were significantly impacting their margins. Should this trend continue, it could lead to increased raw material expenses and reduced net margins.
  
• The biovanillin segment is affected by high supplies of cheaper synthetic alternatives, which could pressure pricing and affect revenue from this product line.
  
• Potential increased supply of bioethanol due to favorable EU incentives may cause market prices to decrease back to 2022 levels, potentially affecting revenue and earnings from this segment.
  
• The company faces ongoing environmental liabilities which may lead to further provisions impacting net earnings and cash flow in the future.
  
• The impact of slow economic conditions in Europe and the uncertainty regarding antidumping duties on synthetic vanillin could affect revenue growth within the BioSolutions and Fine Chemicals segments.

Valuation

• The analysts have a consensus price target of NOK228.6 for Borregaard based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK9.3 billion, earnings will come to NOK1.3 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of NOK203.0, the analyst's price target of NOK228.6 is 11.2% 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.