Expansion In Premium Apples And Logistics Will Strengthen Future Prospects

Key Takeaways

• Expansion into premium apple varieties and new orchards aims to boost Horticulture revenues, margins, and future earnings significantly.
  
• Strategic moves in Global Proteins and Logistics are expected to enhance revenue, earnings, and margins through increased capacity and geographic expansion.
  
• Increased net debt and challenges in logistics, production, and horticulture could pressure Scales' revenue growth and affect short-term profit expectations.

Catalysts

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

• The acquisition of new orchards and increase in premium apple varieties such as Dazzle and Posy are expected to boost Horticulture revenues and margins over time, contributing to higher future earnings.
  
• Increasing the stake in Meateor Australia and driving production volumes creates a stronger foothold in the strategically significant Australian market, which is likely to enhance Global Proteins division revenue and earnings.
  
• The integration of Profruit as a fully owned subsidiary is projected to increase Horticulture's EBITDA by $2.5 to $3 million, improving net margins and earnings over the medium term.
  
• Strategic initiatives within Global Proteins, including capacity increases, geographic expansion, and product development are expected to drive revenue growth and improved margins in the future.
  
• Logistics division’s expansion with the new Auckland warehouse and chiller facility is generating higher external customer volumes, positively impacting logistics revenue and EBITDA margin.

Scales Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scales's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 9.4% in 3 years time.
• Analysts expect earnings to reach NZ$64.4 million (and earnings per share of NZ$0.34) by about February 2028, up from NZ$29.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$47.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 20.5x today. This future PE is lower than the current PE for the NZ Food industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.29%, as per the Simply Wall St company report.

Scales Future Earnings Per Share Growth

Risks

• The transition of start-up projects like Esro Petfood has resulted in increased costs and potential delays in ramping up production, impacting short-term earnings and margin growth.
  
• Scales' net debt has increased significantly from the previous year due to recent acquisitions, which may pressurize cash flow and affect net margins if revenue doesn't grow as forecasted.
  
• Shipping disruptions, a significant challenge for Scales’ major markets in Asia and the Middle East, could negatively affect logistics revenue and Horticulture's ability to meet its export targets, impacting overall revenues.
  
• Lower-than-expected apple volumes due to factors like smaller fruit size and lower apple picks could impede revenue growth within the Horticulture division, even as premium varieties are expected to grow.
  
• The net negative impact of the Bostock and Craigmore transactions is forecasted to reflect a marginal loss in net profit after tax, which might contradict expectations of short-term profit gains.

Valuation

• The analysts have a consensus price target of NZ$4.575 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$686.7 million, earnings will come to NZ$64.4 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of NZ$4.22, the analyst price target of NZ$4.58 is 7.8% 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.