Lephalale Solar Project Will Reduce Emissions And Operational Costs, But Internal Challenges May Affect Performance

Key Takeaways

• Exxaro's advancements in coal exports, efficiency, and cost management are expected to boost revenue and net margins by accessing more markets and optimizing production.
  
• Investments in decarbonization and energy diversification, like the solar and wind projects, aim to reduce emissions, cut costs, and foster long-term earnings growth.
  
• Leadership instability, high costs, logistical challenges, and global economic uncertainty threaten Exxaro's revenue, profitability, and strategic execution.

Catalysts

Engages in coal, iron ore investment, pigment manufacturing, and renewable energy businesses in South Africa, Europe, Australia, and Asia.

• Exxaro plans to increase its coal exports using alternative logistics channels and improved Transnet Freight Rail (TFR) performance, despite previous challenges. This is expected to enhance revenue by accessing more international markets.
  
• Improvements in operational efficiency and cost management, particularly at the Grootegeluk and Belfast mines, where they've increased sustainability and optimized production, are likely to improve net margins.
  
• Exxaro's commitment to its decarbonization roadmap and the development of the Lephalale Solar Project promise reductions in Scope 2 emissions and operational cost savings, enhancing long-term earnings potential.
  
• The company has announced a share repurchase program of ZAR 1.2 billion, subject to market conditions, which could lead to enhanced earnings per share (EPS) by reducing the number of shares outstanding.
  
• Exxaro's diversification into energy solutions, especially with the partnership in the Karreebosch Wind Farm and its engagements in the broader energy transition market, is set to create new revenue streams and improve earnings resilience over the long term.

Exxaro Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Exxaro Resources's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.0% today to 17.5% in 3 years time.
• Analysts expect earnings to reach ZAR 8.0 billion (and earnings per share of ZAR 33.69) by about April 2028, up from ZAR 7.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ZAR9.2 billion in earnings, and the most bearish expecting ZAR6.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, up from 4.7x today. This future PE is greater than the current PE for the ZA Oil and Gas industry at 4.2x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.7%, as per the Simply Wall St company report.

Exxaro Resources Future Earnings Per Share Growth

Risks

• Ongoing internal challenges, such as the recent CEO resignation and the suspension of the Chief Coal Operations Officer, could create instability within leadership, potentially impacting the execution of strategic initiatives and ultimately affecting financial results such as earnings and net margins.
  
• The global economic environment is described as uncertain, influenced by geopolitical tensions, policy shifts, and evolving monetary policies. Such factors could lead to volatility in Exxaro’s revenue streams, especially from international markets, impacting overall revenue growth.
  
• Exxaro's financial performance appears pressured by high costs. For instance, a 32% increase in cash cost per tonne was highlighted. Persistent cost pressures, if not managed effectively, could continue to squeeze margins and reduce net earnings.
  
• The reliance on alternative logistics channels for exports due to rail transportation challenges, and the associated higher costs, could erode profitability, especially if coal prices remain low. This affects revenue and earnings due to increased expense.
  
• Potential structural challenges in domestic markets, including fluctuating rail transport performance and a volatile rand, could impact sales and profitability if Exxaro cannot optimize its operations. This could lead to decreased earnings or require further capital allocation to mitigate such impacts.

Valuation

• The analysts have a consensus price target of ZAR202.5 for Exxaro Resources 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 ZAR225.0, and the most bearish reporting a price target of just ZAR170.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR45.3 billion, earnings will come to ZAR8.0 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 17.7%.
• Given the current share price of ZAR150.0, the analyst price target of ZAR202.5 is 25.9% 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.