Semiconductor And Electronic Materials Surge To Propel Revenue And Increase Profit Margins

Key Takeaways

• Strong growth in the Semiconductor and Electronic Materials segment, driven by AI demand and improved profitability, suggests promising future revenue and profit potential.
  
• Balance sheet enhancements and strategic cost reductions improve financial stability and operational efficiency, indicating sustainable margins and better cash flow management.
  
• Heavy reliance on the Semiconductor and Electronic Materials segment risks revenue downturns, while foreign exchange volatility and restructuring reflect operational challenges and margin pressures.

Catalysts

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

• The Semiconductor and Electronic Materials segment is experiencing strong growth, with sales up 36% year-on-year and a significant improvement in EBITDA margin from 11.4% to 26.2%. This growth is driven by recovery in semiconductor demand, strength in AI semiconductor materials, and recovery in hard disk media sales volume, potentially leading to higher future revenue and profitability.
  
• The company is benefiting from favorable pricing conditions, with sales prices contributing ¥21.4 billion to profit growth. Factors include higher naphtha prices in the Chemicals segment and price revisions due to increased material costs and a weak yen, suggesting potential for revenue enhancement and margin improvements.
  
• Efforts to restructure and optimize the Hard Disk Media business have resulted in reduced fixed costs, contributing to profit increases. This operational efficiency could lead to improved net margins and earnings sustainability.
  
• Balance sheet improvements, such as reduced net interest-bearing debt by ¥36.3 billion and an improved debt-to-equity ratio, enhance the financial stability of Resonac Holdings, potentially leading to better future earnings and cash flow management.
  
• The company forecasts a notable increase in operating income and EBITDA margin for the full year 2024, supported by continued strength in the Semiconductor and Electronic Materials segment, suggesting a promising outlook for revenue growth and profitability.

Resonac Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Resonac Holdings's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 5.1% in 3 years time.
• Analysts expect earnings to reach ¥82.8 billion (and earnings per share of ¥438.37) by about January 2028, up from ¥38.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 19.0x today. This future PE is lower than the current PE for the JP Chemicals industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Resonac Holdings Future Earnings Per Share Growth

Risks

• The company's financial performance is heavily reliant on the Semiconductor and Electronic Materials segment, which accounts for 80% of the full year operating income. A downturn in this specific market could significantly impact overall revenue and earnings.
  
• The Chemicals segment, on the other hand, is experiencing lower sales and profit due to decreased naphtha prices, which could negatively affect both revenue and profit margins if the trend continues.
  
• Foreign exchange volatility poses risks, as net nonoperating income and expenses have worsened by ¥9.5 billion year-on-year primarily due to foreign exchange losses. This could adversely impact earnings and net margins.
  
• The company has undergone significant restructuring, including selling assets and incurring business restructuring expenses, which might reflect underlying operational challenges impacting long-term net margins.
  
• Dependency on price revisions to reflect higher material costs to maintain sales and profit growth might not be sustainable in the long term, risking potential revenue and margin compression if market conditions prevent further price increases.

Valuation

• The analysts have a consensus price target of ¥4636.67 for Resonac Holdings 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 ¥5400.0, and the most bearish reporting a price target of just ¥3510.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1620.4 billion, earnings will come to ¥82.8 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of ¥4015.0, the analyst's price target of ¥4636.67 is 13.4% 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.