Shandong Expansion And Navigate Plan Will Boost Operational Efficiency By 2025

Key Takeaways

• The Shandong factory acquisition and production optimization efforts aim to improve profitability and enhance earnings and EPS.
  
• Capacity expansion and sustainability investments are expected to boost revenue growth and long-term profitability, aligning with strategic financial goals.
  
• The Shandong acquisition strains cash flow and margins; continued market price pressures and wage inflation could further impact financials if not mitigated.

Catalysts

Engages in the development, production, and distribution of rolled aluminum products for thermal management systems, specialty packaging, and niche applications in Europe, Asia, and the Americas.

• Gränges acquired a factory in Shandong, China, which enabled significant market share gains and plans to optimize its production and cost structure to improve profitability, potentially positively impacting earnings and EPS by 2025.
  
• The company intends to focus on optimizing the mix, price, and costs for its newly acquired business in Shandong, with a goal to make the acquisition EPS accretive, likely improving net margins and earnings in the long term.
  
• Gränges completed a multiyear expansion program to increase capacity by 40%, aiming to fully utilize this capacity by the second half of 2025, which could boost revenue growth.
  
• The Navigate plan completed its first phase, resulting in a 70% increase in net profit since 2021, with future growth expected from improved operational productivity and strategic market share gains, enhancing earnings and EPS.
  
• Investment in growth sustainability performance includes increased recycling and reduced carbon footprint, which aligns with financial strategies to improve long-term profitability, potentially enhancing net margins.

Gränges Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gränges's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 5.0% in 3 years time.
• Analysts expect earnings to reach SEK 1.7 billion (and earnings per share of SEK 15.52) by about April 2028, up from SEK 1.0 billion 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 12.6x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 12.1x.
• 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 6.85%, as per the Simply Wall St company report.

Gränges Future Earnings Per Share Growth

Risks

• The acquisition in Shandong, China, although strategically beneficial, has led to a significant working capital build-up, impacting cash flow negatively. If not managed well, it could continue to strain financials, especially cash flow.
  
• The newly acquired business in Shandong currently operates at relatively low margins, which may affect overall net margins until the business mix and pricing can be optimized.
  
• Price pressure and wage inflation were offset by volume growth and productivity improvements in 2024, but continued market price pressures, labor cost inflation, and changes in Chinese export taxation could negatively influence Gränges’ margins and earnings if not mitigated adequately.
  
• The emphasis on market share gains might not be sustainable indefinitely, and over-reliance on capturing new business could strain operational capacities and existing customer relationships, potentially impacting future revenue streams.
  
• The return on capital employed (ROCE) decreased slightly, influenced by the additional capital required for the Shandong acquisition, and maintaining or improving this metric might be challenging if new projects don't yield expected profits swiftly.

Valuation

• The analysts have a consensus price target of SEK161.333 for Gränges 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 SEK179.0, and the most bearish reporting a price target of just SEK145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK32.8 billion, earnings will come to SEK1.7 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of SEK111.8, the analyst price target of SEK161.33 is 30.7% 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.