Digital First Industrial Model And Rare Earth Expansion Will Drive Margin Upside

Catalysts

About Solvay

Solvay is a global leader in essential chemistry, leveraging industrial scale, digitalization and energy transition to supply key materials for advanced and resilient value chains.

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

• Scaling a digital first, AI ready industrial model through condition based monitoring and standardized real time dashboards should structurally lower fixed and variable costs, supporting higher EBITDA margins and more resilient earnings across cycles.
• Execution of the EUR 350 million operational excellence and spending review program by 2028, with EUR 200 million already targeted by 2025, is set to permanently reset the cost base, widening net margins even if volumes remain subdued.
• Expansion in electronic grade hydrogen peroxide and silica aligned with rising semiconductor and data center demand is positioning Solvay to capture higher value volumes, lifting revenue mix quality and long term EBITDA growth.
• Rapid build out of rare earth separation and purification capacity in Europe, including light and heavy elements for permanent magnets, targets structurally growing demand from electrification and energy transition, supporting multi year revenue growth and higher returns on invested capital.
• Energy transition projects and coal phaseout, combined with strategic optimization of CO2 emission rights, should reduce cash energy costs and carbon exposure, underpinning free cash flow generation and de risking long term earnings.

Assumptions

This narrative explores a more optimistic perspective on Solvay compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Solvay's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.1% today to 10.6% in 3 years time.
• The bullish analysts expect earnings to reach €512.0 million (and earnings per share of €4.73) by about December 2028, up from €154.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €249.6 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 9.6x on those 2028 earnings, down from 18.3x today. This future PE is lower than the current PE for the GB Chemicals industry at 24.4x.
• The bullish 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 8.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged global overcapacity in soda ash and structurally weak seaborne demand in Southeast Asia could keep prices at or near cash cost for years, forcing further curtailments at European plants and depressing group revenue and EBITDA from the Basic Chemicals segment.
• Tariff and trade headwinds facing the Coatis business, including elevated U.S. import tariffs on Brazilian products and intense competition from Asian players, may represent a longer term shift rather than a cyclical dip, leading to persistently lower volumes, weaker pricing power and structurally compressed segment margins and earnings.
• The heavy reliance on cost savings, CO2 emission rights optimization and digital efficiency gains to sustain profitability in a flat to declining volume environment risks masking underlying demand weakness, so if savings taper off or carbon monetization becomes less attractive, group EBITDA margins and net income could fall back toward pre program levels.
• Strategic capacity reductions and site consolidations in Europe, undertaken to protect competitiveness and complete the energy transition, could limit Solvay's ability to participate in any eventual volume recovery in key markets such as soda ash and Performance Chemicals, capping long term revenue growth and operating leverage on earnings.

Valuation

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

• The assumed bullish price target for Solvay is €37.0, which represents up to two standard deviations above the consensus price target of €27.2. This valuation is based on what can be assumed as the expectations of Solvay'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 €37.0, and the most bearish reporting a price target of just €20.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €4.8 billion, earnings will come to €512.0 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €26.96, the analyst price target of €37.0 is 27.1% 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.