Accelerated FORWARD! Program Set To Improve Future Performance

Key Takeaways

• Successful cost savings and portfolio transformation initiatives are boosting profitability, improving margins, and enhancing future earnings potential through strategic divestitures.
  
• Emphasis on cash flow improvement and debt reduction, supported by new credit facilities, could enhance free cash flow and decrease financial leverage.
  
• Weak macroeconomic demand, destocking in agro, energy cost volatility, and deleveraging over growth could impede LANXESS's revenue and earnings potential.

Catalysts

Operates as a specialty chemicals company that engages in the development, manufacture, and marketing of chemical intermediates, additives, specialty chemicals, and consumer protection products worldwide.

• LANXESS' successful cost savings program, FORWARD!, and the acceleration of its implementation are expected to continue driving profitability improvements, which could positively impact net margins and earnings.
  
• The company’s emphasis on improving cash flow and reducing debt, supported by securing a new sustainability-linked revolving credit facility, is a catalyst that may enhance future free cash flow and reduce financial leverage.
  
• LANXESS' portfolio transformation, focusing on chemicals and exiting polymers, is advancing faster than planned. The cash proceeds from the divestiture will be used for deleveraging, which should positively affect net debt levels and potentially boost future earnings capacity.
  
• Destocking within the agro industry is anticipated to end in 2025, leading to modest volume improvements for LANXESS, which could support revenue growth in the Consumer Protection segment.
  
• Despite a weak macroeconomic environment, sustainable improvements in operational performance and segment profitability, particularly within Consumer Protection and Additives, are expected to drive EBITDA growth, impacting overall earnings positively.

LANXESS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LANXESS's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.8% today to 1.3% in 3 years time.
• Analysts expect earnings to reach €88.0 million (and earnings per share of €1.63) by about April 2028, up from €-177.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €123 million in earnings, and the most bearish expecting €53.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, up from -11.7x today. This future PE is greater than the current PE for the GB Chemicals industry at 15.9x.
• 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 7.62%, as per the Simply Wall St company report.

LANXESS Future Earnings Per Share Growth

Risks

• Weak macroeconomic demand is clearly visible in 2024, with only a modest improvement expected by the end of 2025, potentially impacting revenue growth.
  
• The company has experienced massive destocking in the agro industry in 2024, affecting the Consumer Protection segment, which could weigh on revenues if similar trends continue.
  
• LANXESS's energy costs can lead to volatility, and while some hedging is in place, 30% remains exposed to spot market fluctuations. This unpredictability could impact net margins.
  
• The Urethane transaction has improved financial leverage, but the cash proceeds are being used for deleveraging rather than business growth, which may restrict potential earnings enhancements.
  
• While the company aims to improve profitability and margins to prior levels of 14-15% or higher over the next two years, this suggests current margins are not satisfactory, posing a risk to near-term earnings.

Valuation

• The analysts have a consensus price target of €28.471 for LANXESS 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 €41.0, and the most bearish reporting a price target of just €19.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.7 billion, earnings will come to €88.0 million, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of €23.92, the analyst price target of €28.47 is 16.0% 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.