Energy Transition And Soda Ash Pressures Will Weigh On Long Term Earnings Potential

Catalysts

About Solvay

Solvay is a global chemicals group focused on essential chemistry, including soda ash, peroxides, silica, bicarbonate, rare earths and fluorine based products.

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

• The push toward lower carbon production and coal phase out could force further cuts at European soda ash sites like Torrelavega, especially if energy transition projects do not deliver competitive costs. This may weigh on segment EBITDA margins over time.
• Reliance on exporting soda ash from Europe to Middle East, Africa and Southeast Asia into a market already affected by Chinese overcapacity and unsustainable pricing leaves Solvay exposed if price pressure persists longer than expected. This could create a potential drag on revenue and EBITDA from Basic Chemicals.
• The rare earth expansion at La Rochelle into Nd Pr, samarium, dysprosium and terbium for permanent magnets depends on customers securing long term offtake and supportive policy frameworks. Any delay or weaker than expected demand for magnets in Europe and North America could limit the earnings contribution from these planned €50 million to €100 million investments.
• Growing semiconductor and electronics demand for electronic grade H2O2 and polishing applications may be slower or more cyclical than anticipated. This would reduce the benefit from recent capacity additions and cap future revenue growth and margin resilience in peroxide and rare earth related lines.
• The digital and AI ready industrial program, including thousands of sensors and condition based maintenance, targets €350 million gross annual savings by 2028. If execution at scale falls short or inflation offsets part of the gains, the net effect on fixed costs and earnings could be materially lower than management’s internal ambitions.

Assumptions

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

• The bearish analysts are assuming Solvay's revenue will decrease by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach €223.0 million (and earnings per share of €2.13) by about January 2029, up from €154.0 million today. The analysts are largely in agreement about this estimate.
• 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 11.9x on those 2029 earnings, down from 18.2x today. This future PE is lower than the current PE for the GB Chemicals industry at 27.1x.
• 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 8.22%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The digital first and AI ready industrial program, including condition based maintenance, thousands of sensors and real time data platforms, is already deployed at scale and has identified tangible savings and avoided repair costs. This could support lower fixed costs and more resilient EBITDA margins over time.
• The company has already delivered €110 million of gross cost savings in 2024 and is targeting €350 million by 2028. Management has indicated it is on track to exceed €200 million by 2025, which could offset revenue pressure and support earnings.
• The rare earths expansion at La Rochelle into Nd Pr, samarium, dysprosium and terbium is backed by existing expertise since 1948 and a global footprint across France, Japan and China. This could secure higher value exposure to permanent magnets, electronics and medical uses, supporting revenue mix and margins.
• Disciplined capital allocation, with essential CapEx capped around €300 million, a focus on small projects in higher growth areas such as electronic grade H2O2 and circular silica, and a stated intent to invest only when offtake is secured, could help protect free cash flow and support earnings stability.
• Progress on energy transition projects, coal phase out and optimization of CO2 emission rights, together with a leverage ratio of 1.8x and net debt guided around €1.7b, suggests financial flexibility that could cushion periods of weaker demand and help sustain net margins and free cash flow.

Valuation

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

• The assumed bearish price target for Solvay is €20.0, which represents up to two standard deviations below the consensus price target of €27.27. 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2029, revenues will be €4.4 billion, earnings will come to €223.0 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €26.76, the analyst price target of €20.0 is 33.8% 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.