High-Performance Polymers Will Capitalize On Megatrends In Batteries And Sustainable Sports

Key Takeaways

• Arkema's strategic projects in Asia and North America aim to enhance earnings through expanded PVDF and bio-sourced polymers production.
  
• Cost reduction efforts and regional sales shifts are set to improve margins and profitability, with strong focus on North America growth.
  
• Geopolitical tensions, weak demand, and supply constraints threaten Arkema's earnings and margins across multiple segments in key regions.

Catalysts

Manufactures and sells specialty materials in Europe, the United States, Canada, Mexico, China, Hong Kong, Taiwan, and internationally.

• Arkema is advancing its major growth projects, particularly in Asia and North America. Key projects include the PVDF expansion in the U.S. and the Singapore plant for bio-sourced polymers. These initiatives are expected to add more than €400 million in EBITDA over the next four years, positively impacting revenue and earnings.
  
• The Adhesive Solutions segment increased its EBITDA by more than 8% in 2024, achieving a record-high EBITDA margin of 15.1%. This was driven by value pricing and synergies from recent acquisitions like Ashland. Continued focus on innovation and operational efficiencies is anticipated to boost net margins and earnings.
  
• With significant growth opportunities in high-performance polymers, particularly in applications linked to megatrends such as batteries and sustainable sports, the Advanced Materials segment saw a robust 20% EBITDA margin. This segment is poised for further margin improvement and earnings growth.
  
• Arkema is targeting €250 million in cost savings by 2028 through a combination of fixed and variable cost reductions, which should support net margin improvement over time and enhance overall profitability.
  
• The company is strategically planning to shift its geographical sales footprint, with Asia and North America projected to increase their share. North America is expected to represent 40% of total sales in the long run, capitalizing on dynamic regional growth and strengthening revenue streams.

Arkema Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arkema's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 5.7% in 3 years time.
• Analysts expect earnings to reach €598.3 million (and earnings per share of €8.32) by about May 2028, up from €338.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €780.1 million in earnings, and the most bearish expecting €456.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 14.8x today. This future PE is lower than the current PE for the GB Chemicals industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 1.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.29%, as per the Simply Wall St company report.

Arkema Future Earnings Per Share Growth

Risks

• Ongoing geopolitical tensions and tariff discussions are causing customer uncertainty and order delays, which could soften demand in key regions and adversely affect Arkema's revenue.
  
• The company's acrylic segment in Europe and the U.S. is facing low-cycle conditions due to weak demand, potentially impacting revenue and net margins until market conditions improve.
  
• Arkema's reliance on growth projects to drive EBITDA may be impacted by macroeconomic conditions, potentially leading to slower-than-expected ramp-up, which could affect future earnings.
  
• The refrigerant gases segment, part of the Intermediates division, is facing a reduction in quotas, which could lead to a decline in this segment's earnings by approximately €30 million.
  
• Any potential shutdowns or supply constraints in Europe, particularly concerning propylene availability, could disrupt operations and inflate costs, impacting Arkema's earnings and net margins.

Valuation

• The analysts have a consensus price target of €93.147 for Arkema 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 €118.0, and the most bearish reporting a price target of just €53.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €10.6 billion, earnings will come to €598.3 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 8.3%.
• Given the current share price of €66.3, the analyst price target of €93.15 is 28.8% 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.