R&D Investments And Global Expansion Will Strengthen Steel Division's Market Position

Key Takeaways

• Strategic market share gains and product innovations are expected to drive revenue and margin growth in key regions and divisions.
  
• Cost reduction initiatives and strategic acquisitions will enhance free cash flow, improve margins, and bolster regional presence.
  
• Weaker market conditions and regional vulnerabilities, especially in the Foundry Division, along with competitive pressures, are adversely impacting Vesuvius's profitability and revenue growth.

Catalysts

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

• Vesuvius' significant market share gains in the Steel Division, particularly in Flow Control and Advanced Refractories, driven by technological advancements and entry into fast-growing regions like India and EMEA, are expected to boost revenues.
  
• The cost reduction program aims to deliver cumulative savings of £45 million by 2028, which should improve net margins by reducing fixed costs, especially in high-cost regions.
  
• Investments in R&D, including 32 new product launches in 2024, are expected to enhance pricing power and market share, driving future revenue growth and potentially increasing margins.
  
• The acquisition of Piromet in Turkey, enhancing Vesuvius' presence in the EMEA region, should bolster revenues and profit margins due to operational synergies and increased robotics capabilities.
  
• The completion of the strategic expansion program, coupled with a reduction in CapEx from the second half of 2025, is expected to significantly improve free cash flow and support earnings growth.

Vesuvius Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vesuvius's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 6.4% in 3 years time.
• Analysts expect earnings to reach £126.6 million (and earnings per share of £0.51) by about April 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 analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, up from 8.9x today. This future PE is lower than the current PE for the GB Machinery industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 3.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Vesuvius Future Earnings Per Share Growth

Risks

• Weaker-than-expected market conditions, particularly a significant decline in the Foundry Division outside of India, have led to decreased revenues, thereby affecting overall profitability. This impacts future revenue growth negatively.
  
• Steel production in North America, a key sales region for Vesuvius, declined significantly by 4.2%, impacting revenues and demonstrating regional vulnerability leading to potential earnings instability.
  
• The Foundry Division's profitability was adversely impacted by a sharp market decline in major regions such as EU, North America, and North Asia, indicating ongoing margin pressures and increased risk to earnings.
  
• The significant volumes of Chinese steel exports, if not reduced, continue to negatively impact steel production growth outside China, affecting revenue projections and potential market share in these regions.
  
• The increased competitive pressure in Advanced Refractories, particularly in EU and North America, has led to market share losses. This puts pressure on revenue stabilization and margin expansion in these regions.

Valuation

• The analysts have a consensus price target of £5.036 for Vesuvius 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 £6.3, and the most bearish reporting a price target of just £3.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.0 billion, earnings will come to £126.6 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 9.1%.
• Given the current share price of £3.14, the analyst price target of £5.04 is 37.7% 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.