Reorganization And Recovery In Semiconductor Demand Will Improve Operational Efficiency

Key Takeaways

• Reorganization and cost reductions in non-core businesses are expected to boost operating income, strengthening net margins and earnings.
  
• Growth in Sumitomo Pharma and high-margin product shipments signal potential revenue increase, enhancing medium to long-term profitability.
  
• Increased competition and external challenges are putting pressure on profit margins and revenue in key segments across Sumitomo Chemical's businesses.

Catalysts

Engages in Chemicals & Plastics, energy and functional materials, IT-related chemicals, health and crop sciences, pharmaceuticals, and other businesses worldwide.

• The reorganization and sale of unprofitable and non-core businesses, enhancing operational efficiency, and reducing costs, are expected to significantly improve core operating income. This should positively impact net margins and overall earnings as less profitable segments are trimmed and operational focus is strengthened.
  
• The improvement in core operating income, driven by favorable performance in Sumitomo Pharma and ICT & Mobility segments, signals potential for increased future revenue streams and higher profitability as these segments continue to perform well and expand. This should translate to better earnings in the medium to long-term.
  
• With an increase in shipments of high-margin products like INDIFLIN in the Agro & Life Solutions segment and a recovery in semiconductor demand, there is an expectation of revenue growth through increased sales volume of higher-margin products. This should positively impact both revenue and earnings over time.
  
• Streamlining SG&A and R&D expenses within Sumitomo Pharma, along with transitioning the Myfembree business under a single operational management, are expected to contribute to improved profitability and cost efficiencies. This will enhance net margins and bolster earnings growth as operational expenses are optimized.
  
• The repayment of interest-bearing liabilities and the sale of fixed assets contribute to improved cash flows, potentially allowing for future strategic investments or debt reduction, which could enhance shareholder value and improve net margins through lower interest expenses in the future.

Sumitomo Chemical Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sumitomo Chemical Company's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.8% today to 3.1% in 3 years time.
• Analysts expect earnings to reach ¥85.9 billion (and earnings per share of ¥52.47) by about May 2028, up from ¥-173.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥108.2 billion in earnings, and the most bearish expecting ¥50.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from -3.2x today. This future PE is greater than the current PE for the JP Chemicals industry at 10.7x.
• 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 10.7%, as per the Simply Wall St company report.

Sumitomo Chemical Company Future Earnings Per Share Growth

Risks

• The restructuring costs in Sumitomo Pharma's North America business, along with impairment losses, represent nonrecurring items that have impacted earnings negatively, potentially dragging down net margins.
  
• Sales prices for crop protection chemicals decreased due to stronger competition, particularly in the Americas, which could lead to reduced revenue and tighter profit margins.
  
• The refining margin at Petro Rabigh deteriorated, affecting the profit margin adversely in the Essential & Green Materials segment, which risks reducing operating income.
  
• The forecast for methionine prices anticipates a decline in the second half of the fiscal year, which could impact revenue negatively in the Agro & Life Solutions segment.
  
• Backlog inventories in South America caused by poor weather conditions could continue to affect the volume of shipments in the crop protection chemical business, thereby potentially decreasing revenue.

Valuation

• The analysts have a consensus price target of ¥432.778 for Sumitomo Chemical Company 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 ¥550.0, and the most bearish reporting a price target of just ¥360.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2736.8 billion, earnings will come to ¥85.9 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 10.7%.
• Given the current share price of ¥343.7, the analyst price target of ¥432.78 is 20.6% 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.