Conway Capacity Ramp And High Value Formats Will Drive Stronger Long Term Prospects

Catalysts

About Westrock Coffee

Westrock Coffee supplies coffee, tea, extracts and ready to drink beverages to major brands through an integrated sourcing, processing and packaging platform.

What are the underlying business or industry changes driving this perspective?

• Rapid volume growth in higher value formats like single serve cups and ready to drink extracts, supported by Conway’s large scale facilities, supports the potential for higher revenue density per pound of coffee and better Segment Adjusted EBITDA over time.
• Conway’s key packaging lines are already running near 80% of original planned capacity with added water and tank farm capacity in place, which creates room for incremental volumes to fall through at attractive incremental margins and support earnings growth.
• The second can line and glass line moving into commercial production, combined with record quarterly Adjusted EBITDA and strong SS&T scalability, positions the company to use existing fixed assets more fully and improve consolidated net margins as volumes build.
• Growing demand for ultra filtered, high protein milk products in aluminum cans, where only large retort plants can serve and Westrock operates some of the largest lines in the country, opens a new category that can leverage current equipment and potentially add a new revenue stream with limited incremental capital and attractive earnings contribution.
• Interest from multiple beverage brand owners in shifting production to Conway, even as one single serve customer faces M&A uncertainty, points to the potential for mix shift toward customers seeking quality, convenience, innovation and price, which can support sustained revenue growth and improved free cash flow generation.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Westrock Coffee compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Westrock Coffee's revenue will grow by 10.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.6% today to 0.7% in 3 years time.
• The bullish analysts expect earnings to reach $12.7 million (and earnings per share of $0.13) by about July 2029, up from -$71.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-60.7 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 103.5x on those 2029 earnings, up from -9.8x today. This future PE is greater than the current PE for the US Food industry at 16.6x.
• The bullish analysts expect the number of shares outstanding to grow by 3.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Reliance on historically high coffee prices and tariffs to lift net sales could reverse if these headwinds ease or if consumers trade down to cheaper formats, which may compress revenue growth and pressure Segment Adjusted EBITDA and consolidated earnings.
• Persistent elevation in coffee prices and tariffs on key sourcing regions such as Brazil, which the company says accounts for 60% of its coffee supply, structurally raises working capital needs and financing costs. This can weigh on free cash flow, net margins and the net loss line even with pass through pricing.
• The potential loss of a large single serve customer linked to an M&A transaction, which management has already factored into conservative covenant resets, could limit utilization of new Conway capacity and slow the ramp of single serve volumes. This may put pressure on revenue growth and Segment Adjusted EBITDA if replacement volumes take longer to materialize.
• Ongoing capital intensity, including the original Conway build out, the remaining US$15 million of capex for the facility and additional spend of around US$5 million to US$6 million to fully enable ultra filtered milk production, alongside new US$30 million convertible notes and equity issuance, may dilute existing shareholders and keep leverage elevated. This can constrain earnings per share and delay improvement in net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Westrock Coffee is $10.0, which represents up to two standard deviations above the consensus price target of $8.88. This valuation is based on what can be assumed as the expectations of Westrock Coffee's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.7 billion, earnings will come to $12.7 million, and it would be trading on a PE ratio of 103.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of $7.16, the analyst price target of $10.0 is 28.4% 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.