Sustainability Trends Will Increase Costs But Spur Efficiency Gains

Key Takeaways

• Rising sustainability demands, regulatory pressures, and aging assets threaten to constrain earnings growth and require ongoing high investment.
  
• Heightened geopolitical risks, tough competition, and merger integration challenges could erode market share, complicate operations, and depress profitability.
  
• Strong semiconductor segment performance, strategic divestments, and pricing power could drive sustained profitability, operational efficiency, and long-term growth amid favorable market trends.

Catalysts

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

• The accelerating global focus on sustainability and decarbonization is prompting tighter environmental regulations and an industry-wide pivot towards greener chemistries. Resonac, with sizable exposure to fossil-derived products in its Chemicals and Mobility segments, faces potentially costly transitions that could inflate capital expenditures and compliance costs, limiting future free cash flow and compressing earnings margins.
  
• Growing geopolitical risks, such as rising protectionism and supply chain fragmentation, are likely to drive ongoing volatility and higher input costs for Resonac's globally integrated operations. This introduces persistent risks to revenue stability and increases uncertainty around long-term profitability.
  
• The company's significant capital intensity, combined with aging production assets, means continuously high investment will be required just to keep up with technological and environmental standards. This siphons resources from net income, raising the risk of structurally weaker margins and slower earnings growth versus peers.
  
• Integration risks remain elevated nearly two years after the merger between Showa Denko and Showa Denko Materials. Higher-than-expected restructuring expenses, coupled with challenges realizing forecast synergies, could further depress earnings and delay any sustained net margin expansion.
  
• Intensifying competition from lower-cost producers in China and Southeast Asia, as well as the threat of technological disruption from new materials, threatens Resonac's traditional product segments with market share erosion and downward pressure on revenue and profitability over the long term.

Resonac Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Resonac Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Resonac Holdings's revenue will decrease by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.0% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach ¥61.3 billion (and earnings per share of ¥341.53) by about September 2028, up from ¥54.7 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 13.7x today. This future PE is lower than the current PE for the JP Chemicals industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Resonac Holdings Future Earnings Per Share Growth

Risks

• Sustained strength in the Semiconductor and Electronic Materials segment, supported by secular trends in digitalization, AI, 5G, and data centers, is driving robust revenue and margin expansion, as shown by double-digit revenue growth and increasing EBITDA margins, which could underpin long-term topline and profit growth.
  
• The company's ability to implement price increases that offset rising costs, evident in the positive sales price impact despite yen appreciation and raw material inflation, reflects pricing power and adaptability that could protect or even expand profit margins in future years.
  
• Ongoing integration synergies following the merger of Showa Denko and Showa Denko Materials continue to offer potential for cost reduction and operational efficiency, which may support lower costs and lead to improved earnings and margins over time.
  
• Strategic business portfolio adjustments, such as divestment of underperforming business lines like the lead-acid battery and regenerative medicine businesses, can help focus resources on high-growth, high-margin areas, thus strengthening future operating profitability and cash flow.
  
• Secular demand growth for advanced materials in the electric vehicle, battery storage, and next-generation semiconductor sectors aligns with both global industry and company strategies, potentially ensuring resilient or accelerating long-term revenue growth despite temporary segment headwinds.

Valuation

• The assumed bearish price target for Resonac Holdings is ¥3300.0, which represents the lowest 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥5700.0, and the most bearish reporting a price target of just ¥3300.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥1133.9 billion, earnings will come to ¥61.3 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of ¥4152.0, the bearish analyst price target of ¥3300.0 is 25.8% 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.