Specialty Chemicals Firm Will Cut Costs And Focus On Biosolutions And Energy Transition For Future Profitability

Key Takeaways

• Strategic realignment and cost-saving initiatives are expected to enhance focus on high-growth areas, reducing costs and improving net margins.
  
• Innovation in Biosolutions, circular economy, and energy transition will drive revenue growth, supported by strong market share gains in key segments.
  
• Divesting unsuccessful businesses may enhance margins, but competitive pressures and economic challenges threaten future revenue growth and introduce execution risks.

Catalysts

Produces specialty chemicals in the Asia-Pacific, Europe, the Middle East, Africa, Central and South America, and North America.

• Evonik Industries' cost-saving initiatives, highlighted by the successful implementation of the Evonik Tailor Made program and upcoming backward integration projects, are expected to significantly reduce costs and improve net margins by 2025.
  
• The strategic realignment of business lines, including exiting underperforming segments like parts of the Health Care and Coating & Adhesive Resins sectors, is anticipated to enhance the company’s focus on high-growth areas, thereby improving revenue and EBITDA margins.
  
• The company's focus on innovation-driven growth through new areas such as Biosolutions, circular economy, and energy transition is projected to generate an additional €1.5 billion in sales by 2032, impacting revenue growth positively.
  
• Despite macroeconomic challenges, Specialty Additives are experiencing strong double-digit volume growth, indicating market share gains in key segments (e.g., oil additives and foams), which will likely bolster revenue and overall earnings.
  
• An optimized operational focus, as evidenced by the clear prioritization of high-value segments and efficient resource allocation, aims to sustain or increase free cash flow conversion rates, enhancing overall profitability and earnings stability.

Evonik Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Evonik Industries's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 5.2% in 3 years time.
• Analysts expect earnings to reach €840.8 million (and earnings per share of €1.8) by about December 2027, up from €229.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €722.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2027 earnings, down from 34.0x 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 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.66%, as per the Simply Wall St company report.

Evonik Industries Future Earnings Per Share Growth

Risks

• The decision to exit and divest underperforming businesses, yielding €350 million in sales with negative EBITDA, may improve margins in the short term, but it also indicates potential revenue loss as the company shrinks its portfolio.
  
• Evonik faces competitive pressure in its methionine business, with new plants in China potentially leading to price competition and impacting profit margins and market share.
  
• Flat to declining volumes, despite recent efforts to control costs, suggest potential stagnation in revenue growth, particularly if volume improvements do not materialize as expected.
  
• The Environmental, Social, and Governance (ESG) and innovation strategies depend on achieving significant new sales (€1.5 billion by 2032) in yet-to-be-proven growth areas, introducing execution risk that could affect future earnings if not successful.
  
• Economic challenges in key markets, including potential recessionary pressures in regions like Europe impacting sectors such as silicas for tire production, could suppress volume demand and subsequently affect revenue growth.

Valuation

• The analysts have a consensus price target of €21.41 for Evonik Industries 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 €26.0, and the most bearish reporting a price target of just €16.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €16.1 billion, earnings will come to €840.8 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 5.7%.
• Given the current share price of €16.7, the analyst's price target of €21.41 is 22.0% 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.