Emissions Regulations And Price Wars Will Erode Refractory Markets

Key Takeaways

• Structural shifts toward decarbonization, alternative materials, and emerging market production threaten core demand and limit long-term revenue growth for Vesuvius.
  
• Mounting price competition, buyer consolidation, and cyclicality in the steel industry put sustained pressure on Vesuvius's margins and market share.
  
• Strong cash generation, innovation, and growth in high-potential regions, combined with cost-saving actions and structural demand drivers, are expected to lift profitability and shareholder value.

Catalysts

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

• Increasing global decarbonization efforts and the potential for even stricter emissions regulations may trigger a structural decline in primary steel and foundry output, directly eroding long-term demand for Vesuvius's core refractories business and capping revenue growth for years to come.
  
• The continued trend of industrial production shifting from mature Western markets to emerging, lower-cost countries is creating ongoing demand volatility and intensifying price competition, making it more difficult for Vesuvius to defend pricing power and maintain net margins as its sales mix pivots away from its historic base.
  
• Rapid advances in materials science are accelerating the substitution of traditional steel with alternatives such as composites, plastics, and aluminum in both automotive and construction sectors, leading to a secular reduction in the addressable market for Vesuvius's products and threatening future top-line and earnings growth.
  
• Vesuvius's heavy reliance on the inherently cyclical steel industry exposes the company to prolonged periods of stagnation or decline, particularly as protectionist measures, tariffs, and Chinese steel overcapacity continue to disrupt global trade flows and undercut the anticipated recovery in core Western end-markets.
  
• Escalating competition from low-cost Asian refractory producers, coupled with increased buyer consolidation among the world's largest steelmakers, is likely to produce sustained margin compression for Vesuvius as price pressure builds and market share becomes more difficult to defend in key global regions.

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 decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach £108.3 million (and earnings per share of £0.45) by about July 2028, up from £87.2 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 8.0x on those 2028 earnings, down from 10.9x today. This future PE is lower than the current PE for the GB Machinery industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 6.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.54%, as per the Simply Wall St company report.

Vesuvius Future Earnings Per Share Growth

Risks

• Vesuvius continues to deliver strong and consistent cash flows, maintain low net leverage, and is targeting a cumulative £400 million in free cash flow by 2027, which could support further dividend increases and share buybacks, positively affecting shareholder returns and potentially lifting the share price.
  
• Significant ongoing investment in R&D, with the launch of over 30 new products in 2024 and a new product sales ratio now reaching 19.1%, underpins technological differentiation and supports sustained market share gains, which can drive revenue and margin expansion over the long term.
  
• The company is well-positioned in high-growth regions such as India and EMEA, with scalable brownfield opportunities and ongoing capacity expansions, suggesting above-market growth potential for both the Steel and Foundry divisions and supporting long-term revenue growth.
  
• Vesuvius is executing an accelerated and expanded cost-reduction programme, targeting £45 million in savings by 2028, which is expected to contribute materially to improving net margins and overall profitability, even in the event of market headwinds.
  
• Secular tailwinds such as global infrastructure investment, the modernization of steel production outside China, and strong policy support in India for domestic steel capacity expansion all underpin a recovery and long-term structural demand for Vesuvius's products, which could boost revenues and support multiple expansion.

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 £1.8 billion, earnings will come to £108.3 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 9.5%.
• Given the current share price of £3.88, the bearish analyst price target of £3.3 is 17.5% 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.