Specialty Chemicals Expansion And ICT Recovery Will Improve Future Performance

Key Takeaways

• Strengthening operations via investments and restructuring should boost revenue and net margins in Specialty Chemicals.
  
• Strategic gains and market recovery promise improved earnings, aided by pricing and currency advantages.
  
• Operational challenges, high costs, and demand weakness in key segments threaten Mitsui Chemicals' profitability and earnings growth despite restructuring efforts.

Catalysts

Engages in the mobility, life and health care, basic and green materials, ICT, and other businesses worldwide.

• The expected increase in operating income for the Specialty Chemicals domain by ¥8.7 billion due to increased sales volume suggests future revenue growth.
  
• Investments in expanding MR high refractive index ophthalmic lens material capacity, driven by sales outpacing market growth, are positioned to enhance revenue growth in the Specialty Chemicals sector.
  
• The restructuring and optimization efforts across business units are anticipated to contribute to better net margins by streamlining operations and reducing inefficiencies.
  
• The recovery in semiconductor and smartphone markets, despite being uneven, indicates potential for increased revenues in the ICT Solutions segment.
  
• Strategic actions like inventory valuation gains and sales price increases in Basic & Green Materials, alongside yen depreciation benefits, are set to improve earnings.

Mitsui Chemicals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsui Chemicals's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 5.2% in 3 years time.
• Analysts expect earnings to reach ¥112.6 billion (and earnings per share of ¥606.31) by about March 2028, up from ¥50.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥131.1 billion in earnings, and the most bearish expecting ¥73.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the JP Chemicals industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Mitsui Chemicals Future Earnings Per Share Growth

Risks

• The failure at the ethylene plant in Osaka Works has led to a significant loss and decline in profits within the Basic & Green Materials segment. Continued operational challenges or plant failures could negatively impact both revenue and net margins.
  
• Demand for Basic & Green Materials continues to be sluggish, with no expected major recovery. This ongoing demand weakness could lead to lower revenue and constrained earnings growth.
  
• Increased fixed costs and other expenses, including those from aggressive investments and rising labor and material costs, are negatively impacting net margins and may limit overall earnings growth despite revenue increases.
  
• The recovery in semiconductor markets is uneven, and the pace of recovery in some applications has slowed, particularly within ICT Solutions, which may lead to inconsistent contributions to revenue and earnings across segments.
  
• Despite some positive gains from restructuring, high fixed costs related to new plant operations, SG&A, and rising R&D expenses across various segments, combined with repair and maintenance costs, could significantly impact net margins and constrain overall profitability.

Valuation

• The analysts have a consensus price target of ¥4370.0 for Mitsui Chemicals 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 ¥5500.0, and the most bearish reporting a price target of just ¥3250.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2152.8 billion, earnings will come to ¥112.6 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 7.6%.
• Given the current share price of ¥3618.0, the analyst price target of ¥4370.0 is 17.2% 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.