Agricultural Demand And Operational Upgrades Will Secure A Bright Future

Key Takeaways

• Strong demand for green products and high-value specialties is expected to boost sales and margins, driving revenue growth for Borregaard.
  
• Operational improvements and currency hedging could stabilize revenue and enhance financial resilience despite trade and currency challenges.
  
• Trade tensions and increased expenses could affect Borregaard's revenue and margins, while reliance on agriculture exposes it to sector-specific risks.

Catalysts

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

• Strong sales in the agriculture segment, driven by the increasing demand for green and biocontrol products, are expected to positively impact revenue growth and EBITDA margins.
  
• The favorable product mix in BioSolutions, particularly with high-value specialty products, is anticipated to boost overall earnings and contribute to higher net margins.
  
• Tariffs and trade dynamics, although presenting some uncertainty, might have less impact on Borregaard due to its highly specialized products and diverse market presence, thereby potentially stabilizing revenue despite global trade fluctuations.
  
• Continuous investment and focus on operational improvements, such as the electrification of biopolymer spray dryers to reduce energy costs, are likely to enhance net margins over time.
  
• Ongoing currency hedging strategies and anticipated positive currency effects are expected to have a favorable impact on EBITDA and earnings, providing financial resilience amidst currency volatility.

Borregaard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Borregaard's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 12.1% in 3 years time.
• Analysts expect earnings to reach NOK 1.1 billion (and earnings per share of NOK 12.68) by about May 2028, up from NOK 823.0 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 26.2x on those 2028 earnings, up from 21.6x today. This future PE is greater than the current PE for the GB Chemicals industry at 21.1x.
• 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 6.71%, as per the Simply Wall St company report.

Borregaard Future Earnings Per Share Growth

Risks

• The introduction of a 10% tariff on imports from Norway into the U.S. could impact Borregaard's revenues from their U.S. sales, as 10% of their sales last year came from Norway to the U.S. The lower volume of exports due to these tariffs might have a negative effect on revenue.
  
• Increased supply of advanced bioethanol in Europe, based on agricultural waste, is expected to lead to significantly lower sales prices for Borregaard's bioethanol, which could decrease revenue and impact net margins in the Fine Chemicals segment.
  
• Higher wood and logistical costs have increased expenses for Borregaard, which could limit the company's ability to increase net margins and impact overall profitability.
  
• Potential negative effects on global GDP growth from tariffs and trade tensions could ultimately reduce demand for Borregaard's products, affecting revenue growth across its segments.
  
• The strong current reliance on the agricultural sector for BioSolutions' revenues might expose Borregaard to risks associated with any downturn in agriculture or shifts in customer demand, potentially impacting revenues and earnings.

Valuation

• The analysts have a consensus price target of NOK237.333 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 NOK9.0 billion, earnings will come to NOK1.1 billion, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of NOK178.4, the analyst price target of NOK237.33 is 24.8% 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.