Green River Expansion And Hydrogen Peroxide Licensing Propel Earnings Growth

Key Takeaways

• Expansion of Green River facility and sustainability efforts position Solvay to benefit from future revenue growth and attract environmentally conscious customers.
  
• Cost-saving initiatives and strategic licensing agreements are set to bolster margins and support long-term earnings stability.
  
• Market uncertainty, negative pricing impacts, and rising costs could challenge Solvay's future revenues, net margins, and earnings sustainability.

Catalysts

Provides advanced materials and specialty chemicals worldwide.

• Solvay's expansion of the Green River soda ash facility by 600,000 tonnes and improved export capabilities are expected to drive future revenue growth, particularly when market demand recovers.
  
• The recent implementation of a new regenerative thermal oxidation process at Green River contributes to a 4% reduction in Solvay's greenhouse gas emissions, positioning the company as a leader in sustainable soda ash production, which might attract environmentally conscious customers, positively impacting revenue and margins.
  
• Solvay's ongoing cost-saving initiatives, accruing €31 million in additional savings in Q3 2024, are expected to support net margins and overall earnings, with a target of €300 million savings by 2028 through modernization and digitalization of operations.
  
• The licensing agreement related to hydrogen peroxide could provide recurring high-margin revenue streams, which supports EBITDA growth, as the company expands its licensing strategy in the high-margin HPPO industry.
  
• Solvay's focus on maintaining its leadership in essential chemicals and capturing opportunities in growth markets, like the growing demand for bicarbonate in industrial applications and sustainable products, is likely to stabilize revenue and provide earnings resilience in the future.

Solvay Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solvay's revenue will decrease by -1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach €410.7 million (and earnings per share of €3.89) by about December 2027, up from €-64.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €543.8 million in earnings, and the most bearish expecting €293 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2027 earnings, up from -50.0x today. This future PE is lower than the current PE for the GB Chemicals industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Solvay Future Earnings Per Share Growth

Risks

• Solvay did not observe any structural recovery in its markets, and the incremental revenue achieved earlier in the year was not sustained in the third quarter, potentially impacting future revenues.
  
• Despite a modest organic sales increase, there was a negative pricing impact from soda ash, with expectations of continued pricing pressure, which could affect net margins.
  
• The EBITDA margin decreased compared to the previous year, partly due to negative pricing impacts and cost pressures, posing a risk to earnings sustainability.
  
• The company expects a cautious start to 2025 due to uncertainty around a market recovery, suggesting potential revenue and earnings challenges in the near term.
  
• Solvay anticipates temporarily higher corporate costs in 2025 and 2026 linked to stranded costs and ERP rollout, which could pressure net margins and overall cost structure.

Valuation

• The analysts have a consensus price target of €33.88 for Solvay 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 €40.0, and the most bearish reporting a price target of just €26.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €5.0 billion, earnings will come to €410.7 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of €30.69, the analyst's price target of €33.88 is 9.4% 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.