Catalyst Innovations And Renewable Energy Propel Growth Amid Industry Challenges

Key Takeaways

• Covestro's initiatives to reduce CO2 emissions and enhance renewable energy use aim to cut costs and improve margins.
  
• Increasing production reliability and potential synergies from transactions indicate promising long-term revenue and EBITDA growth.
  
• Declines in sales due to low prices, high working capital, and industry downturns could strain Covestro's liquidity and profitability, while leverage risks might affect future growth financing.

Catalysts

Supplies high-tech polymer materials and application solutions.

• The installation of a new catalyst in Covestro's nitric acid plant in China is expected to significantly reduce CO2 emissions by 60,000 tons per year by the end of 2024, potentially reducing operational costs and improving net margins.
  
• The shift towards renewable energy, as evidenced by the new PPA with BP for solar power, is expected to lower energy costs and enhance net margins by reducing dependency on fossil fuels.
  
• The introduction of an innovative heat battery by Rondo Energy at the Brunsbüttel site in Germany by 2026 is anticipated to decrease CO2 emissions by 13,000 tons annually, lowering operational expenses and potentially boosting earnings over time.
  
• Continuous volume growth (6.1% year-on-year) driven by improved demand and production reliability suggests potential for future revenue growth as internal availability issues are resolved.
  
• Ongoing improvements in production reliability and potential operational synergies from the ADNOC transaction are expected to positively impact revenue and EBITDA in the long term.

Covestro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Covestro's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.8% today to 4.8% in 3 years time.
• Analysts expect earnings to reach €767.9 million (and earnings per share of €3.79) by about November 2027, up from €-261.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €288.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2027 earnings, up from -41.4x today. This future PE is lower than the current PE for the GB Chemicals industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 2.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.41%, as per the Simply Wall St company report.

Covestro Future Earnings Per Share Growth

Risks

• The company's sales were negatively affected by lower prices, which led to an unfavorable price environment impacting their revenues and EBITDA.
  
• A continuation of high working capital due to inventory buildup could strain liquidity, potentially impacting free cash flow and overall financial health.
  
• Declines in key industry sectors such as Automotive and Construction, combined with negative market outlooks, suggest potential challenges in driving sustained revenue growth.
  
• The historical trend of negative growth in specific segments raises concerns over persistent low margins that could affect profitability.
  
• The company's net debt situation, with a total net debt-to-EBITDA ratio at 3.0x, suggests potential leverage risks that may impact their ability to finance future growth initiatives or maintain investment-grade credit ratings.

Valuation

• The analysts have a consensus price target of €60.08 for Covestro 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 €62.0, and the most bearish reporting a price target of just €50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €16.0 billion, earnings will come to €767.9 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of €57.24, the analyst's price target of €60.08 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.