Restructuring, Lucas Meyer Cosmetics, And Sunliquid Set To Boost Margins And Drive Earnings

Key Takeaways

• Identifying restructuring opportunities and targeting significant savings could improve Clariant's net margins and earnings efficiency in the coming years.
  
• Strategic moves in Lucas Meyer Cosmetics and Additives business aim to enhance revenue and profitability by capitalizing on economic trends.
  
• Declining volumes and weak demand, particularly in the Catalyst segment and Europe, pose challenges to Clariant's revenue growth and profitability amidst a tough macroeconomic environment.

Catalysts

Engages in the development, manufacture, distribution, and sale of specialty chemicals worldwide.

• Clariant is identifying additional restructuring opportunities, forecasting CHF 6 million in annual run rate savings, which suggests future improvements in net margins and earnings.
  
• Lucas Meyer Cosmetics is expected to contribute a full margin from Q4 2024 after overcoming inventory revaluations, enhancing revenue and long-term profitability in Care Chemicals.
  
• The completion of sunliquids restructuring with reduced operational impacts and recovery of impairments could help stabilize earnings and cash flow.
  
• The company is targeting CHF 175 million in savings by 2025, which could bolster net margins and drive earnings improvements through enhanced efficiency.
  
• Clariant plans to capitalize on recovery in industrial GDP and shifting back to durable goods demand, which could boost revenue in its Additives business by 2025.

Clariant Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Clariant's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 8.2% in 3 years time.
• Analysts expect earnings to reach CHF 379.7 million (and earnings per share of CHF 1.08) by about December 2027, up from CHF 118.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF 443.2 million in earnings, and the most bearish expecting CHF 309.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2027 earnings, down from 28.1x today. This future PE is lower than the current PE for the GB Chemicals industry at 21.5x.
• Analysts expect the number of shares outstanding to grow by 2.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.46%, as per the Simply Wall St company report.

Clariant Future Earnings Per Share Growth

Risks

• Clariant's Catalyst business has experienced a significant decline in volumes, with a 20% decrease in local currency sales. This drop, particularly due to lower refill and new-fill activities, poses a risk to future revenues and profitability in this segment.
  
• The European chemical industry is facing weak demand and declining business confidence, which, if prolonged, could continue to limit Clariant's chemical production and negatively affect overall revenue growth.
  
• The macroeconomic environment remains challenging, with manufacturing PMIs below 50 in key regions such as Europe and the U.S., indicating a weak outlook for industrial activities. This could impact Clariant's ability to achieve its medium-term revenue targets.
  
• Reported EBITDA margins have been under pressure, decreasing to 14% in the third quarter due to lower Catalyst volumes. Prolonged pressure on margins could adversely affect net earnings, particularly if cost savings do not offset the impacts of declining sales.
  
• There's increasing competition and volatility in the Chinese market, particularly affecting the Catalyst segment. The 13% organic decrease in China highlights potential risks to Clariant's revenue growth in one of the world's largest chemical markets.

Valuation

• The analysts have a consensus price target of CHF 14.65 for Clariant 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 CHF 18.0, and the most bearish reporting a price target of just CHF 11.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CHF 4.7 billion, earnings will come to CHF 379.7 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of CHF 10.1, the analyst's price target of CHF 14.65 is 31.0% 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.