New European Acquisitions Will Expand Poultry Production Capacity By 90%

Key Takeaways

• Strategic expansions in product lines and facilities are expected to boost production capacity, enhance margins, and support long-term revenue growth.
  
• Focus on efficient operations and consumer trends aims to improve cost structure and profitability, aligning with future earnings targets.
  
• Expansion challenges, including under-utilized capacity and rising costs from acquisitions, combined with high debt and taxes, threaten Scandi Standard's profitability and 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 the Netherlands, featuring two of Europe's most efficient breaded poultry lines, is expected to increase production capacity for frozen breaded products by 90%, likely boosting future revenue and creating a strong platform for long-term growth.
  
• Scandi Standard's strategic focus on the consumer trend of chicken being an affordable, sustainable protein is expected to drive increased consumption and long-term volume growth, potentially enhancing revenue figures.
  
• Expansion of the Ready-to-cook platform in Lithuania is anticipated to provide a low-cost, high-quality hub, improving the company's cost structure and allowing for enhanced net margins and EBIT per kilo as operations are scaled up.
  
• Investments in efficiency improvements and value-added processes in both Ready-to-cook and Ready-to-eat segments are expected to bolster EBIT per kilo to above SEK 3, which aligns with the company's 2027 targets, potentially enhancing overall earnings.
  
• The ramp-up of operations in recently acquired or upgraded facilities, such as the expansion in Norway and the new Oosterwolde plant, is positioned to support better margins and increased sales, which should contribute to earnings growth as these efforts mature.

Scandi Standard Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scandi Standard's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 3.4% in 3 years time.
• Analysts expect earnings to reach SEK 534.0 million (and earnings per share of SEK 8.08) by about February 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 11.5x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the GB Food industry at 22.4x.
• 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 4.5%, as per the Simply Wall St company report.

Scandi Standard Future Earnings Per Share Growth

Risks

• The company faces risks of an under-absorption of fixed costs due to the addition of excess capacity in the Netherlands, which could lower profitability if the capacity is not fully utilized. This situation could negatively impact net margins and earnings.
  
• Start-up costs and integration challenges from new acquisitions, such as the plant in Lithuania and the facilities in the Netherlands, may temporarily drag on profits and increase financial expenses, impacting net margins.
  
• Higher finance net costs due to increased debt levels and expiration of favorable interest rate swaps could lead to higher interest expenses, reducing net earnings.
  
• The current high tax rate, which is more representative of what to expect going forward, could lead to a higher tax burden and reduce net margins compared to previous years.
  
• The presence of European overcapacity and stagnation in the market post-COVID-19 poses a risk that demand may not grow rapidly enough to absorb new production capabilities, which could affect future revenue growth and margins.

Valuation

• The analysts have a consensus price target of SEK83.0 for Scandi Standard based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK93.0, and the most bearish reporting a price target of just SEK78.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK15.7 billion, earnings will come to SEK534.0 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 4.5%.
  
• Given the current share price of SEK82.2, the analyst price target of SEK83.0 is 1.0% 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.