ERP Rollout And Weak Service Recovery Will Pressure Margins And Earnings Outlook

Catalysts

About Metso Oyj

Metso Oyj supplies equipment, services and process solutions for aggregates and minerals processing customers globally.

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

• A slower than expected recovery in higher margin services, including upgrades and modernizations that were close to zero in late 2024 and are only gradually feeding into 2025, could keep the services share of sales subdued and cap group EBITA margins and earnings.
• Greater reliance on small equipment and projects in Minerals, while large project decisions are pushed into 2026, risks tying more working capital into lower ticket orders and limiting pricing power, which may weigh on revenue quality and net margins.
• If customer utilization in key aggregates markets such as Europe stays weak even as equipment orders improve, the mix could tilt further toward lower margin capital sales rather than recurring services, putting pressure on EBITA margins and absolute earnings.
• Ongoing ERP rollout affecting roughly 80% of the business by year end, after already generating about €10m of extra quarterly costs, creates execution risk that process disruptions or extended external support needs could add to operating expenses and hold back margin recovery.
• Continued focus on energy efficient grinding, screening capacity in Romania and Western Canada service expansion increases the fixed asset base, and if customer projects or commodity related demand soften, these additions could depress returns on capital and constrain free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Metso Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Metso Oyj's revenue will grow by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.1% today to 11.8% in 3 years time.
• The bearish analysts expect earnings to reach €757.9 million (and earnings per share of €0.92) by about July 2029, up from €482.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.8x on those 2029 earnings, down from 26.0x today. This future PE is lower than the current PE for the FI Machinery industry at 25.1x.
• The bearish 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 7.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Healthy Minerals and Aggregates order intake, with total second quarter orders up 6% in reported currencies and 10% in constant currencies, suggests underlying demand for equipment and services that could support revenue and earnings rather than pressure them.
• Service order growth in the Minerals segment, with services orders up 5% and 10% in constant currencies and the service order book increasing by about €160 million in the first half of 2025, points to a pipeline of higher quality, recurring business that may improve revenue mix and net margins as it converts to sales.
• Cash generation appears resilient, with second quarter cash flow from operations of €147 million and first half 2025 cash flow from operations of €343 million, which is described as an 11% improvement year on year, and a completed €200 million inventory reduction program. Taken together, these factors could underpin financial flexibility and support future earnings.
• Long term investments in energy efficient grinding, new screening capacity and Western Canada service expansion, together with acquisitions such as Swiss Tower Mills and the China screening business, are aimed at supporting key secular trends in energy efficiency and mining demand, which may support revenue growth and margins over time instead of eroding them.
• The ERP rollout that currently weighs on profitability, with around €10 million of extra quarterly costs and temporary disruption, is described as largely successful for 80% of the business and is intended to improve process efficiency, working capital management and scalability. This could lower operating costs and support EBITA margins once fully embedded.

Valuation

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

• The assumed bearish price target for Metso Oyj is €13.12, which represents up to two standard deviations below the consensus price target of €17.04. This valuation is based on what can be assumed as the expectations of Metso Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €21.5, and the most bearish reporting a price target of just €13.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €6.4 billion, earnings will come to €757.9 million, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of €15.16, the analyst price target of €13.12 is 15.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.