No Stopping The Elkem ASA (OB:ELK) Growth Train

There's no stopping the Elkem ASA (OB:ELK) growth train, with analysts forecasting high top-line growth in the near future. Currently trading at ØRE36.52, the share price has been relatively stable over the past couple of months. I've been researching ELK for a while, and am impressed with the business led by Mr. Helge Aasen. In this article, I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

First, a short introduction to the company is in order. Elkem ASA produces materials worldwide. Its principal products include silicon, silicones, ferrosilicon, foundry alloys, carbon materials, and microsilica. Founded in 1904, it currently operates in Norway at a market cap of ØRE22.00B.

The company is growing incredibly fast, with a year-on-year revenue growth of 17.06% over the past financial year , and a net income growth of 34.82%. Since 2013, revenue has risen 7.97%, congruent with larger capital expenditure, which most recently reached ØRE930.34M. ELK has been reinvesting more into the business, leading to expected return on investment of 16.75% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to ØRE2.76B over the next year, and over the next five years, earnings are expected to grow at an annual rate of 12.36% on average, compared to the industry average growth of 10.36%. These figures illustrate ELK's strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether ELK is a risky investment or not. Elkem's balance sheet is robust, with high levels of cash generated from its core operating activities (0.46x debt) able to service its borrowings. Although its debt level relative to equity is high at 40.12%, it generates a sufficient level of earnings which amply covers its annual interest payment 17.71x. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward. ELK has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. ELK has managed its cash well at a current level of ØRE1.49B. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

ELK is now trading at ØRE36.52 per share. At 602.47 million shares, that's a ØRE22.00B market cap - which is too low for a company that has a 5-year free cash flow cumulative average growth (CAGR) trajectory of 7.97% (source: analyst consensus). With an upcoming 2018 free cash flow figure of ØRE1.35B, the target price for ELK is øre45.39. This means the stock is currently trading at a meaningful 19.53% discount. Furthermore, comparing ELK's current share price to its peers based on its industry and earnings level, it's undervalued by 29.23%, with a PE ratio of 15.09x vs. the industry average of 19.5x.

As an investor, I look for investments which does not compromise one fundamental factor for another. ELK is appealing because of the growth story, the possibility that it is yet to be factored into the share price, and the strong capital management. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.