Asia 94% Sales And Shandong Production Will Drive Success

Key Takeaways

• Strong sales growth in Asia and regional production strategy reduce tariff risks, boosting market share and improving net margins.
  
• Sustainability focus with recycled materials and green bonds enhances brand value and profitability through cost savings.
  
• Gränges faces risks from weak automotive and economic conditions, currency fluctuations, aluminum tariffs, and high capital expenditures, which could affect margins and cash flow.

Catalysts

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

• Gränges is experiencing strong sales volume growth, particularly in Asia with a 94% increase and continued market share gains in all regions and customer segments. This expansion is expected to boost future revenues.
  
• The company has rapidly ramped up production in its new Shandong factory, which has already reached a breakeven run rate. This positions Gränges for further revenue and earnings growth as it improves price and product mix over time.
  
• Gränges’ strategy of regional production mitigates risks from tariffs, reducing potential cost increases and enhancing net margins, as products sold in each region are mainly produced within the same region.
  
• The focus on increasing recycled aluminum use and issuing a green bond highlights Gränges' commitment to sustainability, which could contribute to improving net margins and future profitability through cost savings and enhanced brand value.
  
• With a new strategic phase focusing on less capital expenditure and improved cash flow, combined with potential buyback mandates, Gränges anticipates enhancing earnings per share by returning capital to shareholders.

Gränges Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gränges's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 5.2% in 3 years time.
• Analysts expect earnings to reach SEK 1.7 billion (and earnings per share of SEK 14.88) by about May 2028, up from SEK 1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 12.5x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 12.2x.
• 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 6.82%, as per the Simply Wall St company report.

Gränges Future Earnings Per Share Growth

Risks

• Negative growth in the automotive sector in the Americas and a weak economic sentiment in Europe pose risks to Gränges' revenue stability, potentially affecting future earnings in these regions.
  
• The ramp-up of the new facility in Shandong is currently at breakeven for profitability; reliance on low-margin product segments may not contribute strongly to net margins if mix improvements are not achieved.
  
• Currency fluctuations, such as the strengthening SEK against the USD, could negatively impact financial results, including net earnings, in upcoming quarters.
  
• Increased aluminum prices in the U.S. due to tariffs and associated cost increases may pressure profit margins, despite cost pass-through mechanisms, impacting net earnings.
  
• The high capital expenditure related to past expansions and the need to optimize new operational capacities may delay cash flow improvements and affect overall financial robustness.

Valuation

• The analysts have a consensus price target of SEK157.0 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 SEK178.0, and the most bearish reporting a price target of just SEK133.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK33.2 billion, earnings will come to SEK1.7 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of SEK120.7, the analyst price target of SEK157.0 is 23.1% 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.