Electric Furnace Shift And EPR Recycling Will Support A Fairly Valued Recycler

Catalysts

About Derichebourg

Derichebourg is a global metal waste recycler and provider of community waste collection services, with a reference shareholding in catering group Elior.

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

• Planned conversions of European steel production from blast furnaces to electric furnaces are set to increase local demand for scrap, which can support scrap volumes and help stabilise unit margins, feeding through to revenue and EBITDA resilience.
• European quota reforms and higher customs duties on imported steel, along with the carbon border adjustment mechanism, are expected to make locally sourced recycled inputs more attractive for steelmakers, which could benefit pricing power and gross margins.
• Growing regulatory push for Extended Producer Responsibility across electrical equipment, vehicles, hot water tanks and future battery streams is widening fee based recycling flows where Derichebourg is already invested, supporting a higher share of less volatile, service driven EBITDA.
• Electrification trends that rely heavily on copper, together with Orange’s copper network dismantling and a new 18,000 ton per year cable shredding line, position the group to handle richer copper streams, which can lift mix, revenue per ton and operating margins.
• Entry into battery recycling and lead refinery projects with partners such as LG Energy and planned vertical integration in France are aimed at capturing value in higher complexity waste, which can support long term revenue growth, improve net margins and smooth earnings through more specialized recycling lines.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Derichebourg's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 4.9% in 3 years time.
• Analysts expect earnings to reach €209.6 million (and earnings per share of €1.29) by about July 2029, up from €132.3 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.4x on those 2029 earnings, down from 11.4x today. This future PE is lower than the current PE for the GB Commercial Services industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged weakness in the European automotive sector, with lower production on European soil and uncertainty around the move between combustion, hybrid and electric engines, could restrain scrap availability and aluminum ingot orders from carmakers, which would pressure revenue and EBITDA.
• A sustained downturn in European construction activity, reflected in the 30% to 40% drop in building permits and starts in several countries, could keep demand for long steel subdued, which would weigh on pricing, gross margins and overall earnings.
• Higher Chinese crude steel exports and any further pressure on steel prices in Europe, combined with currency headwinds from a weaker dollar on dollar-denominated contracts, could cap selling prices for scrap and non ferrous metals, limiting commercial margin and EBITDA growth.
• Ambitious expansion plans in battery recycling, lead refining and hot water tank processing require significant upfront investment of at least €35 million and rely on markets that management itself describes as not yet existing at scale, so slower than expected ramp up or technical issues could dilute returns and weigh on net margins.
• Derichebourg’s increasing exposure to more specialized recycling niches such as EPR streams, copper cable shredding and hazardous waste refining is intended to reduce earnings volatility. However, execution missteps, regulatory delays or weaker than expected fee based volumes could prevent these activities from offsetting cyclicality in traditional scrap, limiting future resilience of revenue and earnings.

Valuation

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

• The analysts have a consensus price target of €10.26 for Derichebourg 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 €11.0, and the most bearish reporting a price target of just €9.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €4.3 billion, earnings will come to €209.6 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of €9.51, the analyst price target of €10.26 is 7.4% higher. 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.