Electric Arc Adoption And Decarbonization Will Shrink Global Market

Key Takeaways

• Structural shifts in steelmaking, materials use, and customer preferences threaten long-term demand for Vesuvius's products, compressing revenues and profitability.
  
• Geopolitical risks and shifting trade dynamics heighten supply chain, margin, and cash flow volatility, complicating future earnings stability.
  
• Strong growth in India, product innovation, cost efficiencies, and flexible global capacity position Vesuvius to outperform in recovering markets and cyclical upturns.

Catalysts

Provides molten metal flow engineering and technology services to steel and foundry casting industries worldwide.

• Accelerating global decarbonization and emissions regulations could permanently erode long-term steel and foundry sector growth, structurally reducing Vesuvius's addressable market and putting chronic downward pressure on revenues for years to come.
  
• More rapid adoption of electric arc furnaces in steelmaking, which require significantly less refractory material, is likely to cause a persistent decline in demand for Vesuvius's core products, further compressing overall revenues and gross margins over the medium to long term.
  
• Heightened geopolitical fragmentation and trade barriers have the potential to destabilize Vesuvius's global supply chain, driving input cost volatility, operational complexity, and material risks to net margins and cash flow sustainability.
  
• Should customers in key regions such as Europe continue to trade down to lower-cost, lower-margin products-potentially becoming a permanent behavioral shift rather than a temporary response-Vesuvius faces prolonged profitability erosion and mounting challenges to pricing power.
  
• Ongoing technological substitution in automotive and infrastructure sectors, including shifts toward advanced composites and polymers, threatens to cannibalize traditional refractory demand, undermining Vesuvius's R&D investments and limiting future earnings growth despite recent product launches.

Vesuvius Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Vesuvius compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Vesuvius's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.9% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach £96.2 million (and earnings per share of £0.39) by about August 2028, up from £70.3 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 9.2x on those 2028 earnings, down from 12.5x today. This future PE is lower than the current PE for the GB Machinery industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 6.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.13%, as per the Simply Wall St company report.

Vesuvius Future Earnings Per Share Growth

Risks

• Sustained long-term growth and higher profitability in India, driven by rapid infrastructure expansion and Vesuvius's strong market positioning, could significantly boost group revenues and margins as the region's performance already exceeds group averages and ongoing investment will intensify this effect.
  
• Investments in R&D and successful rollout of new, higher-value-added products are pushing Vesuvius's new product sales ratio toward the company's long-term 20 percent target, which strengthens pricing power, supports gross margins, and enhances competitive differentiation in future earnings.
  
• Strategic cost reduction programs and major plant automation initiatives have already yielded substantial savings, with a further £22 million targeted by 2028, which will improve profit margins and free cash flow as underlying markets recover.
  
• The company's expanded manufacturing footprint and flexible capacity-especially in India and Turkey-enable rapid and low-cost scaling to capture new opportunities in global markets or respond to rebounds in Europe, supporting revenue growth potential and capital efficiency.
  
• Global overcapacity reduction in Chinese steel, coupled with potential rebounds in U.S. and European steel demand and foundry stabilization, position Vesuvius to benefit disproportionately from any cyclical upturn, providing upside risk to both revenue and profitability as most of its sales are outside China.

Valuation

• The assumed bearish price target for Vesuvius is £3.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Vesuvius'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 £5.9, and the most bearish reporting a price target of just £3.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £96.2 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of £3.58, the bearish analyst price target of £3.3 is 8.6% 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.