Composite Fiber Technologies Will Benefit From Growing US Demand

Key Takeaways

• Expansion of the concrete plant network and investment in plant upgrades are expected to boost revenue growth and improve margins.
  
• Cost controls, a strong balance sheet, and strategic capital allocation set the stage for future earnings growth and reduced net debt.
  
• Revenue volatility and risks in U.S. Composites and Concrete could impact profitability, despite strong construction materials demand and vertical integration efforts.

Catalysts

Engages in the production and sale of construction materials in Australia, the United States, New Zealand, the United Kingdom, and PNG & Malaysia.

• The continued expansion of the concrete plant network in Southeast Queensland, with multiple new sites under development, is expected to drive revenue growth from increased concrete volumes and improved margins in the Construction Materials segment.
  
• Investment in plant upgrades, particularly at the Wellcamp quarry, is anticipated to enhance production capacity and efficiencies, leading to higher margins and potentially increased earnings from the Quarries business.
  
• The turnaround in the Composite Fiber Technologies segment, supported by a growing demand for new products like power poles and a robust pipeline in the U.S. market, is likely to boost revenues and contribute to earnings growth.
  
• Cost control measures and operating efficiencies in the cement business are expected to lead to margin improvements, positively impacting net margins and potentially increasing net income.
  
• A strong balance sheet, with reduced net debt and significant cash flow generation, positions Wagners for future growth opportunities, which could enhance earnings through strategic capital allocation and investments.

Wagners Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wagners Holding's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.5% today to 4.4% in 3 years time.
• Analysts expect earnings to reach A$26.7 million (and earnings per share of A$0.14) by about July 2028, up from A$19.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, down from 21.2x today. This future PE is lower than the current PE for the AU Basic Materials industry at 29.0x.
• 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 7.69%, as per the Simply Wall St company report.

Wagners Holding Future Earnings Per Share Growth

Risks

• The company's revenue for the first half was down compared to the prior corresponding period due to the completion of a large project, highlighting the potential volatility in revenue from cyclical large project work. This could pose a risk to consistent future revenue streams.
  
• January historically experiences lower demand and includes a major shutdown impacting the cement business, potentially affecting the predictability and stability of revenue and margins in the second half of the fiscal period.
  
• While construction materials demand is expected to remain strong, the absence of any major new project opportunities could potentially lead to a plateau or decline in revenue growth from this segment.
  
• The Composites business in the U.S. is improving but remains a potential risk if losses are not fully contained and the expected demand for new products like power poles does not materialize. This could affect the segment’s contribution to earnings.
  
• Concrete business improvements are partially driven by the vertical integration strategy, but the division overall is still close to breakeven with some plants not yet profitable, adding risk to achieving return on capital targets and net margins.

Valuation

• The analysts have a consensus price target of A$2.1 for Wagners Holding 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 A$607.3 million, earnings will come to A$26.7 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$2.24, the analyst price target of A$2.1 is 6.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.