Silicon Carbide Focus Will Drive Future Market Revitalization

Key Takeaways

• Strengthening focus on silicon carbide and semiconductors positions SGL Carbon for future growth despite a short-term market slowdown.
  
• Exploring strategic options for the Carbon Fiber segment may enhance earnings by removing loss-inducing components.
  
• Decline in carbon fiber and semiconductor sectors, asset write-offs, and supply chain issues pose significant challenges to SGL Carbon's revenue and profitability.

Catalysts

Engages in the manufacture and sale of special graphite, carbon fibers, and composite products in Germany, rest of Europe, the United States, China, rest of Asia, and internationally.

• The Process Technology business unit has demonstrated significant profitability improvement, with EBITDA pre up 46.3% compared to last year without any special effects, indicating potential for sustained revenue growth and margin expansion.
  
• The company is focusing on silicon carbide and semiconductor markets, with a positive long-term outlook despite a temporary slowdown, suggesting ability for future revenue recovery and revitalization.
  
• The company's strategy of selective investment and cost management, including delaying some investments, indicates potential for improved net margins and earnings stability.
  
• SGL Carbon's leadership in graphite solutions, particularly with silicon carbide for semiconductors, positions the business well in becoming a key supplier as markets stabilize and grow again.
  
• The evaluation of strategic options for the Carbon Fiber business, such as potential divestment, could positively impact future earnings by eliminating a loss-making segment from the financials.

SGL Carbon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SGL Carbon's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 9.5% in 3 years time.
• Analysts expect earnings to reach €115.3 million (and earnings per share of €0.93) by about January 2028, up from €68.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €63 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 6.6x today. This future PE is lower than the current PE for the GB Electrical industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

SGL Carbon Future Earnings Per Share Growth

Risks

• The semiconductor and LED business within Graphite Solutions has shown only modest growth, and there is an expectation of no growth in the silicon carbide sector in 2025, which could impact future revenue and earnings.
  
• There is a noticeable decline in the carbon fiber business, with sales down 12.5% and negative EBITDA, exacerbated by overcapacity and competition, particularly from Chinese companies, affecting margins and cash flow.
  
• Composite Solutions has suffered a significant sales and EBITDA drop due to the termination of a favorable contract, and ongoing negotiations for cancellation fees introduce uncertainty in future revenue projections.
  
• The company is writing off substantial assets related to carbon fiber, which will impact net results and equity, with potential further impairments if market expectations don't improve as anticipated.
  
• There's a softening in order intake in Process Tech and potential delay in growth due to supply issues in semiconductor markets, including customer shift from growth to inventory management, affecting revenue visibility and cash flow.

Valuation

• The analysts have a consensus price target of €8.44 for SGL Carbon 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 €11.4, and the most bearish reporting a price target of just €4.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €115.3 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of €3.69, the analyst's price target of €8.44 is 56.3% 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.