European Oversupply And Rising Costs Will Erode Margins

Key Takeaways

• Shifting industry dynamics and lagging innovation in green production threaten Salzgitter's market share, profitability, and competitive positioning.
  
• Heightened regulatory pressures, persistent overcapacity, and ongoing investment demands risk weakening free cash flow and long-term financial stability.
  
• Enhanced regulatory support, decarbonization leadership, cost efficiency, and resilient premium segments position Salzgitter for stable growth and margin expansion amid shifting European demand.

Catalysts

Engages in steel and technology businesses worldwide.

• The surge in the adoption of alternative green construction materials and engineered timber is expected to erode structural steel demand in Europe-Salzgitter's core market-causing persistent revenue pressure and further undermining volume growth over the next decade.
  
• The company's slow pace relative to larger rivals in the commercialization of low-carbon steel production could lead to sustained loss of market share, resulting in declining sales volumes and increasing operating inefficiency, which will compress both revenue and net margins.
  
• Continued overcapacity in the European steel sector, combined with growing inflows of Chinese steel imports and chronic global oversupply, is likely to keep steel prices depressed, leading to structurally weaker realized prices and sustained margin erosion.
  
• Sustained and escalating capital expenditure obligations for decarbonization programs, such as SALCOS, will strain free cash flow and push net debt higher, increasing financial risk and leaving less capital for shareholder returns or strategic growth opportunities.
  
• Accelerating implementation of global carbon pricing regimes and intensifying climate-related regulation pose an ongoing and material threat to Salzgitter's cost base-further eroding competitiveness, suppressing future profitability and ultimately threatening long-term earnings stability.

Salzgitter Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Salzgitter compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Salzgitter's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.5% today to 2.7% in 3 years time.
• The bearish analysts expect earnings to reach €244.5 million (and earnings per share of €4.43) by about August 2028, up from €-421.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.0x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.44%, as per the Simply Wall St company report.

Salzgitter Future Earnings Per Share Growth

Risks

• Intensifying political and regulatory support in Europe, such as stricter trade defense measures, CBAM implementation, and incentives within the Steel and Metals Action Plan, could materially reduce steel imports, level the playing field, and enhance demand for domestic producers like Salzgitter, supporting revenue and future profit margins.
  
• Growing emphasis on decarbonization and hydrogen-based steel, including Salzgitter's leadership with SALCOS and partnerships for green steel with OEMs and the construction sector, positions the company to capture premium markets and margin expansion as global customers increasingly demand sustainable steel, driving long-term earnings growth.
  
• Strong performance and expansion in higher-value and less cyclical segments, such as the KHS Technology division and defense-grade heavy plate (with the potential to fill up to 50% of a key plant's capacity), help insulate the company from core steel price volatility and underpin more stable cash flows and net income.
  
• The company's rigorous and expanding cost reduction and restructuring programs, targeting €500 million in annualized savings by 2028, paired with robust working capital management and a healthy equity ratio above 42%, strengthens operational resilience, improves free cash flow, and supports net margins even in weak demand environments.
  
• Significant planned investments and policy-driven shifts towards infrastructure, renewable energy (wind, pipeline), and defense spending in Europe, especially from 2026 onward, are likely to lift sector demand, create new market opportunities for Salzgitter, and drive a recovery in volumes and revenue over the medium to long term.

Valuation

• The assumed bearish price target for Salzgitter is €15.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Salzgitter's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €45.0, and the most bearish reporting a price target of just €15.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €9.2 billion, earnings will come to €244.5 million, and it would be trading on a PE ratio of 4.0x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of €22.44, the bearish analyst price target of €15.5 is 44.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.