Acquisitions And Expansions Will Boost Global Proteins And Horticulture Operations In Future

Key Takeaways

• Strategic investments in premium apple varieties and logistics are expected to boost revenues and margins in Horticulture and Logistics segments over the coming years.
  
• Expansion and profitability in Global Proteins, including Meateor Australia and Esro Petfood, will enhance earnings and contribute to overall EBITDA growth by 2025.
  
• Geo-political uncertainty and strategic project delays threaten stability and growth, impacting logistics, Global Proteins, and overall earnings variability.

Catalysts

Engages in manufacture and trading of food ingredients in New Zealand, Asia, Europe, North America, and internationally.

• The acquisition and integration of Profruit and additional orchards supports Scales' strategy of focusing on higher-margin premium apple varieties, which is expected to boost Horticulture revenues and improve net margins over the coming years.
  
• The completion of Meateor Australia and Esro Petfood's transition from start-up to profitability is anticipated by the end of 2025, enhancing Global Proteins earnings and contributing positively to overall group EBITDA.
  
• The ongoing orchard redevelopment program and a strategic focus on premium apple varieties are expected to increase revenue from horticulture through improved volumes and higher average prices, particularly with the projected growth of premium apple volumes.
  
• Logistics is expected to continue performing strongly with improved airfreight and ocean freight volumes, substantially increasing underlying EBITDA in 2024, with anticipated continued volume growth aiding revenue stability.
  
• Strategic capital investments, such as the new in-plant collection and cooling system in the U.S. and the European location expansion in Global Proteins, are aimed at long-term operational efficiency leading to enhanced earnings capability.

Scales Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scales's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 9.2% in 3 years time.
• Analysts expect earnings to reach NZ$64.6 million (and earnings per share of NZ$0.38) by about March 2028, up from NZ$30.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$75.3 million in earnings, and the most bearish expecting NZ$53.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 19.3x today. This future PE is lower than the current PE for the NZ Food industry at 16.1x.
• Analysts expect the number of shares outstanding to grow by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Scales Future Earnings Per Share Growth

Risks

• The shift from organic to conventional farming in horticulture could be negatively perceived by markets and may impact premium apple volumes leading to variability in revenue.
  
• Geo-political uncertainty affecting trade routes and market stability poses a risk to the logistics division, potentially impacting margins and earnings.
  
• Revenue and margin pressure in the Pet Food Ingredients business due to increased volumes from start-up business units could lead to variability in the earnings growth for this division.
  
• Delays in the execution of strategic projects, such as the Esro plant, could lead to slower-than-expected growth in Global Proteins, affecting future revenue and EBITDA targets.
  
• Possible partial divestment of dividends due to the increasing offshore nature of earnings can influence shareholders’ perception and impact the company's overall attractiveness, potentially affecting net earnings.

Valuation

• The analysts have a consensus price target of NZ$4.7 for Scales 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 NZ$705.7 million, earnings will come to NZ$64.6 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of NZ$4.12, the analyst price target of NZ$4.7 is 12.3% 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.