Green Hydrogen Delays And Weak Pool Demand Will Pressure Long-Term Earnings

Catalysts

About Industrie De Nora

Industrie De Nora develops electrochemical and water treatment technologies serving industrial, municipal and energy transition applications worldwide.

What are the underlying business or industry changes driving this perspective?

• As green hydrogen projects transition from one off flagships to a more consolidated market dominated by a few large players, any failure to convert the current multi gigawatt pipeline into firm contracts could leave the Energy Transition business with a near empty backlog after NEOM and Stegra. This could sharply compress revenues and segment earnings.
• Increasing regulatory scrutiny and slow, bureaucratic decision making around low emissions hydrogen support schemes and offtake contracts in Europe and other regions risk prolonged delays in final investment decisions. This would strand installed capacity and R&D spend and drive structurally weaker margins at group level.
• The current outperformance and high margins in the pools line are heavily reliant on a favourable mix of aftermarket and geography. A normalization of replacement demand or a slowdown in discretionary pool spending in North America and Europe could reverse the mix benefit and drag down group EBITDA margins from the recently upgraded 19 percent range.
• Growth in PFAS remediation and broader advanced water treatment is contingent on continued regulatory tightening and public funding. Any rollback, slower implementation or budget constraints could cap the scale of this opportunity and limit its contribution to Water segment revenues and profitability.
• Rising geopolitical tensions and evolving trade relationships across Asia, EMEIA and the Americas increase the risk of postponed or cancelled large Electrode Technologies projects. This could potentially turn the strong current order intake into a volatile revenue profile and pressure net income if fixed costs cannot be flexed quickly.

Assumptions

This narrative explores a more pessimistic perspective on Industrie De Nora compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Industrie De Nora's revenue will decrease by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.1% today to 8.2% in 3 years time.
• The bearish analysts expect earnings to reach €68.4 million (and earnings per share of €0.34) by about December 2028, down from €91.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €79.9 million.
• 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 25.0x on those 2028 earnings, up from 15.2x today. This future PE is greater than the current PE for the IT Machinery industry at 17.2x.
• The bearish 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 11.57%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Core Water and Electrode Technologies businesses are demonstrating sustained order growth across geographies, with backlog in Water up more than 20% versus year end 2024 and Electrode Technologies order intake up over 20%. This supports multi year revenue resilience and could prevent a prolonged top line decline for the group, supporting revenues and earnings.
• Structural drivers in water infrastructure and contamination control, including PFAS regulation, desalination and municipal upgrades, are creating a growing pipeline of high value projects and aftermarket contracts that can compound over time and underpin high margin recurring work, bolstering long term revenue visibility and net margins.
• The pools line is benefiting from durable secular shifts toward automated disinfection and conversion from traditional chemical treatment, with strong aftermarket and pricing power that management believes are not purely cyclical. This could sustain elevated profitability in Water and keep group EBITDA margins around or above current levels.
• Energy Transition activities, despite near term backlog gaps after NEOM and Stegra, position De Nora as a key green hydrogen technology supplier with more than 3.2 gigawatts already delivered and around 3 gigawatts of projects where it is preferred supplier. Eventual final investment decisions could reaccelerate segment growth and support group earnings.
• A solid balance sheet, strengthening net cash position and disciplined capital allocation, including targeted M&A in Water and continued R&D investment, enhance strategic flexibility. This allows the company to capture consolidation opportunities and innovate in high growth niches, which could protect and expand net income over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Industrie De Nora is €6.2, which represents up to two standard deviations below the consensus price target of €10.24. This valuation is based on what can be assumed as the expectations of Industrie De Nora'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 €15.1, and the most bearish reporting a price target of just €6.2.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €831.6 million, earnings will come to €68.4 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of €6.98, the analyst price target of €6.2 is 12.6% lower.
  
• 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.