Chemical Realignment And Adhesives Expansion Will Build A Resilient Future

Key Takeaways

• Shift to high-margin specialty chemicals and divestment of non-core operations are expected to enhance profitability.
  
• Expansion into specialty adhesives and sustainability initiatives aim to drive revenue and demand for value-added products.
  
• Challenging market conditions, high operating costs, increased debt, and overcapacity in key markets pose risks to Synthomer's revenue growth and profit margins.

Catalysts

Provides specialised polymers and ingredients in the United Kingdom and internationally.

• The strategic reorientation towards higher-margin specialty chemicals, along with divestments of non-core operations, is expected to improve Synthomer's revenue and margins, fostering better profitability.
  
• Synthomer's actions on cost efficiency and reliability, including a procurement program projected to save £40-50 million, are likely to enhance net margins and support earnings growth.
  
• The gradual completion of Synthomer's divestment program, potentially generating £100 million or more, may reduce debt leverage and support a stronger balance sheet, positively affecting net margins.
  
• Investments in innovation centers in China and the United States aim to bolster top-line growth by expanding market presence in high-growth regions, thus positively impacting revenue.
  
• Synthomer's further expansion into specialty adhesives and new product developments, especially in sustainability-focused areas, are poised to drive revenue and improve earnings as demand for value-added products increases.

Synthomer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Synthomer's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 0.2% in 3 years time.
• Analysts expect earnings to reach £4.7 million (and earnings per share of £0.03) by about April 2028, up from £-70.0 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 92.7x on those 2028 earnings, up from -2.0x today. This future PE is greater than the current PE for the GB Chemicals industry at 18.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.56%, as per the Simply Wall St company report.

Synthomer Future Earnings Per Share Growth

Risks

• Continued challenging market conditions and slow demand in end markets could impact Synthomer's ability to achieve substantial revenue growth in the near term.
  
• Higher operating costs due to wage inflation and increased bonus accruals present risks to net margins, potentially offsetting any gains from revenue growth.
  
• The company has increased net debt due to non-recurring outflows and a fine, which, despite plans to reduce leverage, could impact future earnings if not managed effectively.
  
• Overcapacity in the nitrile butadiene rubber (NBR) market, combined with pricing pressures, could lead to lower profit margins for Synthomer’s Health & Protection division.
  
• Foreign exchange impacts have already negatively affected revenue, and these could continue to pose risks to earnings if unfavorable currency movements persist.

Valuation

• The analysts have a consensus price target of £1.887 for Synthomer 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 £3.66, and the most bearish reporting a price target of just £0.97.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.2 billion, earnings will come to £4.7 million, and it would be trading on a PE ratio of 92.7x, assuming you use a discount rate of 12.6%.
• Given the current share price of £0.85, the analyst price target of £1.89 is 55.1% 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.