Acquisition In Turkey And Merged Product Lines Will Deliver Success

Key Takeaways

• HEXPOL's strategic acquisitions and product integration are set to enhance revenue growth and improve operational efficiency, positively affecting future margins.
  
• Emphasis on sustainability and strategic sourcing mitigates external pressures, positioning HEXPOL for growth with stable sales and premium pricing potential.
  
• Reliance on acquisitions to maintain sales amidst declining margins and lower automotive demand could threaten long-term growth if macroeconomic uncertainties persist.

Catalysts

Develops, manufactures, and sells various polymer compounds and engineered gaskets, seals, and wheels in Sweden, rest of Europe, the United States, rest of the Americas, and Asia.

• The acquisition of Kabkom in Turkey positions HEXPOL to capitalize on growth in the wire and cable segment, especially with the increasing demand for fire-resistant compounds driven by electrification. This should positively impact future revenue growth.
  
• HEXPOL's organizational changes, including integrating thermoplastics (TP) and thermoplastic elastomers (TPE) into one product area, aim to strengthen operations and drive growth by leveraging similar production processes and customer relationships. This is expected to enhance operational efficiency and potentially improve margins.
  
• The focus on sustainability and high demand for recycled products, particularly from the automotive industry, positions HEXPOL to take advantage of a growing trend towards sustainable materials, which could boost both revenues and margins through premium pricing and efficiency in resource use.
  
• The U.S. trade policy and tariff landscape is prompting HEXPOL to actively manage supplier relationships and explore alternative sourcing strategies to mitigate raw material costs, thereby protecting margins despite external economic pressures.
  
• The stable sales in Europe and North America, coupled with strong sales growth in Asia from Engineered Products, lay a solid foundation for HEXPOL's earnings growth, particularly as global demand stabilizes and infrastructure spending increases.

HEXPOL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HEXPOL's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 12.1% in 3 years time.
• Analysts expect earnings to reach SEK 2.6 billion (and earnings per share of SEK 7.22) by about May 2028, up from SEK 2.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 13.3x today. This future PE is lower than the current PE for the GB Chemicals industry at 23.9x.
• 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 5.53%, as per the Simply Wall St company report.

HEXPOL Future Earnings Per Share Growth

Risks

• The U.S. trade policy and potential tariffs could impact raw material prices and lead to increased costs, affecting gross margins.
  
• Lower demand in the automotive segment, which was not fully offset by growth in other sectors, might negatively impact overall revenue trends.
  
• While organic sales saw a decrease, there was reliance on acquisitions (such as Piedmont) to maintain sales levels; this could affect long-term sustainable growth and net margins if acquisitive actions do not continue at a similar pace.
  
• Margins are declining, driven by a less profitable product mix and higher operational expenses; this might result in squeezed net earnings if the trend continues.
  
• Uncertainty in the macroeconomic environment, including tariffs and trade policies, might affect demand in North America and overall revenue stability.

Valuation

• The analysts have a consensus price target of SEK100.0 for HEXPOL 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 SEK115.0, and the most bearish reporting a price target of just SEK90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK21.2 billion, earnings will come to SEK2.6 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of SEK83.7, the analyst price target of SEK100.0 is 16.3% 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.