Embracing EU Sustainability Regulations And M&A Will Boost Net Margins And Revenue Growth

Key Takeaways

• HEXPOL's focus on sustainability and recycled products positions it well for EU regulatory changes, potentially boosting demand and revenue.
  
• Flexible operations and strategic M&A could enhance margins and earnings through adaptation and integration efforts.
  
• Declining automotive demand and lower raw material prices are impacting revenues, while delayed acquisitions and mismatched expectations hinder growth projects.

Catalysts

Engages in development, manufacture, and sale of various polymer compounds and engineered products in Sweden, Europe, the Americas, and Asia.

• HEXPOL's focus on sustainability, particularly in recycled products and adapting to EU regulations for end-of-life vehicles, could drive future demand in the automotive industry, potentially increasing revenue.
  
• The company is well-prepared for the proposed EU regulations requiring up to 25% recycled materials in vehicles, which might provide a competitive edge and support revenue growth.
  
• The decentralized and flexible operations structure allows HEXPOL to adapt efficiently to changing market conditions, which could help maintain or improve net margins.
  
• HEXPOL is actively pursuing M&A opportunities, supported by its strong financial position, which could enhance revenue and earnings if successful acquisitions are integrated effectively.
  
• Efforts to improve efficiency across operations and explore organic growth opportunities indicate a potential for increased net margins and earnings in the future.

HEXPOL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HEXPOL's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 13.0% in 3 years time.
• Analysts expect earnings to reach SEK 2.9 billion (and earnings per share of SEK 8.28) by about January 2028, up from SEK 2.4 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 17.1x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the GB Chemicals industry at 20.5x.
• 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 5.19%, as per the Simply Wall St company report.

HEXPOL Future Earnings Per Share Growth

Risks

• Declining demand from the automotive sector is a significant concern, given that 40% of HEXPOL's sales are tied to this industry. This could negatively impact future revenues if the trend continues.
  
• Lower prices for key raw materials and negative currency effects have reduced sales prices, contributing to decreased revenue and margins.
  
• Organic sales are down 7% due to a combination of lower volumes and lower sales prices, indicating potential challenges in maintaining revenue growth.
  
• Acquisitions have been delayed by a mismatch in price expectations between buyers and sellers, potentially impacting future acquisition-driven growth and earnings expansion plans.
  
• Weakness in some key segments, particularly automotive, alongside the potential for a lagged effect on financials due to customers absorbing weaker demand, poses risks to future revenues and profit margins.

Valuation

• The analysts have a consensus price target of SEK 121.8 for HEXPOL 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 SEK 21.9 billion, earnings will come to SEK 2.9 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 5.2%.
• Given the current share price of SEK 102.8, the analyst's price target of SEK 121.8 is 15.6% 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.