Investments In Oosterwolde And Lithuania Will Increase Future Production Capacity

Key Takeaways

• Strategic acquisitions and investments in Ready-to-eat and Ready-to-cook facilities are positioned to boost revenue and earnings growth significantly.
  
• Strong consumer demand for chicken and process efficiency improvements are likely to enhance margins and profitability over time.
  
• Increased finance costs, acquisitions with high start-up expenses, and market stagnation pose significant risks to Scandi Standard's profitability and revenue growth.

Catalysts

Produces and sells chilled, frozen, and ready-to-eat chicken products in Sweden, Norway, Ireland, Denmark, Finland, Germany, the United Kingdom, rest of Europe, and internationally.

• The acquisition of the Ready-to-eat plant in Oosterwolde, with increased capacity for breaded products, is expected to provide Scandi Standard a solid growth platform, likely impacting revenue and earnings positively as capacity utilization increases over time.
  
• The development of the Ready-to-cook platform in Lithuania as a low-cost, high-quality hub is expected to enhance Scandi Standard’s EBIT per kilo significantly above SEK 3 in the medium term, driving earnings growth.
  
• Strong consumer trends favoring chicken for its affordability, sustainability, and versatility are predicted to support long-term volume and value growth, positively impacting revenue and net margins.
  
• Strategic initiatives to increase value from protein through deboning and ramping up the efficiency of processes are anticipated to enhance EBIT margins and overall profitably, leading to potential margin expansion over time.
  
• Investments in expanding Ready-to-eat capacity and entry into new markets are expected to drive revenue growth and improve margins, with the Dutch acquisition expected to transition the company into top-tier production capabilities.

Scandi Standard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scandi Standard's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 3.1% in 3 years time.
• Analysts expect earnings to reach SEK 479.2 million (and earnings per share of SEK 7.23) by about March 2028, up from SEK 275.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 19.6x today. This future PE is lower than the current PE for the GB Food industry at 20.4x.
• 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 4.76%, as per the Simply Wall St company report.

Scandi Standard Future Earnings Per Share Growth

Risks

• Increased finance costs and absence of favorable interest rate swaps have led to higher debt levels and financial expenses, which could negatively impact net margins and earnings.
  
• The Lithuanian and Dutch acquisitions involve significant start-up costs and long ramp-up times, potentially slowing short-term EBIT per kilo growth and affecting profitability targets.
  
• There is a stagnation in certain markets like QSR (Quick Service Restaurants) post-COVID-19, and inflation negatively impacts demand, which could hinder revenue growth.
  
• High lost time injury rates indicating potential operational inefficiencies may increase operational costs and affect net margins.
  
• The expenses related to expanding production capacity might result in under-absorption of fixed costs, putting pressure on profit margins if expected demand does not materialize.

Valuation

• The analysts have a consensus price target of SEK78.0 for Scandi Standard 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 SEK15.3 billion, earnings will come to SEK479.2 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 4.8%.
• Given the current share price of SEK82.6, the analyst price target of SEK78.0 is 5.9% lower. 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.