EV And AI Secular Trends Will Strengthen Advanced Materials

Key Takeaways

• Accelerating AI and electrification trends could drive sustained growth, enhanced margins, and a stronger competitive position in advanced materials and specialty technologies.
  
• Strategic restructuring, global footprint, and focus on high-value segments may unlock new revenue streams, improved earnings quality, and market share gains over rivals.
  
• Ongoing struggles in key segments, heavy restructuring costs, and overreliance on semiconductor demand expose Resonac Holdings to financial risk and limited growth potential.

Catalysts

Operates as a chemical company in Japan, China, rest of Asia, and internationally.

• Analyst consensus expects Resonac to benefit from the boom in AI semiconductors, but consensus may be underestimating both the rapidity and magnitude of demand acceleration given AI proliferation across infrastructure, autos, and edge devices, which could translate into persistent above-trend double-digit revenue growth and sustained improvement in EBITDA margins.
  
• While analysts broadly highlight R&D synergies, they may be undervaluing the potential for Resonac's computational science and informatics integration to catalyze multiple breakthrough products, positioning Resonac as a critical supplier for next-generation EVs and grid decarbonization, which could substantially lift net margins and strengthen long-term earnings power.
  
• The surge in global EV production and electrification is driving unprecedented demand for advanced materials and battery components, and Resonac's strategic investments in high-value energy storage materials position it to capture market share from less agile competitors, resulting in significant upside to long-run revenues and cash flow.
  
• Increased global supply chain regionalization amid rising geopolitical tensions is accelerating localization of critical materials, and Resonac's international operational footprint and innovation in specialty materials are likely to yield new recurring revenue streams from multinational customers, supporting both top-line expansion and incremental improvement in operating margins.
  
• The ongoing operational integration and cost restructuring-including the proactive exit from unprofitable graphite electrode markets and potential Crasus Chemical spin-off-will enable Resonac to redeploy capital towards high-growth specialty segments, likely boosting return on invested capital, balance sheet strength, and overall earnings quality well beyond market expectations.

Resonac Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Resonac Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Resonac Holdings's revenue will grow by 3.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.6% today to 7.2% in 3 years time.
• The bullish analysts expect earnings to reach ¥111.0 billion (and earnings per share of ¥614.39) by about July 2028, up from ¥35.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 18.5x today. This future PE is greater than the current PE for the JP Chemicals industry at 11.2x.
• 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 8.44%, as per the Simply Wall St company report.

Resonac Holdings Future Earnings Per Share Growth

Risks

• The significant decline in profit within the Chemicals segment-mainly due to the weak graphite electrode market and decreasing sales volume and price-reflects Resonac Holdings' legacy exposure to low-margin, cyclical commodity chemicals, which limits the company's ability to drive sustainable margin and net income growth.
  
• The company's heavy capital restructuring expenses, including costs associated with business reorganization and retirement packages as part of structural reforms in its graphite electrode business, suggest ongoing needs for modernization and compliance investments that may constrain free cash flow and long-term dividend sustainability.
  
• Fluctuations in foreign exchange rates and recent foreign exchange losses amid yen appreciation substantially reduced profit attributable to owners of the parent, exposing Resonac Holdings to continuing financial volatility that can negatively impact overall earnings.
  
• The divestiture of secondary battery packaging and food packaging materials in the Mobility segment, combined with weak automotive markets, signals difficulty in adapting to shifting industry trends and demand, potentially resulting in stagnating or declining revenue in certain business units.
  
• Persistent flat total revenue and only segment-specific growth (mainly in semiconductors) underline the risk that Resonac's limited innovation pace and overreliance on current strong demand for advanced semiconductor materials may leave it vulnerable to rapid market shifts and competitive pressures, which can suppress future revenue and margin expansion.

Valuation

• The assumed bullish price target for Resonac Holdings is ¥5760.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Resonac Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5760.0, and the most bearish reporting a price target of just ¥3300.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ¥1534.1 billion, earnings will come to ¥111.0 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of ¥3638.0, the bullish analyst price target of ¥5760.0 is 36.8% 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.