Expansion In Photosensitive Polymers Will Meet Future Semiconductor Demand

Key Takeaways

• Strategic expansion in photosensitive polymers and resins targets semiconductor industry growth, potentially significantly boosting revenue.
  
• Structural reforms and downsizing efforts could enhance profitability and investor confidence, positively impacting earnings and stock value.
  
• Competitive market pressures, structural reforms, demand fluctuations, inflation, and exchange rate volatility may collectively challenge revenue, margins, and earnings for Mitsubishi Chemical Group.

Catalysts

Provides performance products, chemicals, industrial gases, health care products, and other products in Japan and internationally.

• Mitsubishi Chemical Group's plan to increase production capacity for photosensitive polymers and exchange resins positions it to benefit from growing demand in the semiconductor industry, potentially boosting revenue.
  
• The group's decision to accelerate business selection and concentration efforts aims to enhance growth potential, competitiveness, and profitability, which could result in improved net margins.
  
• Structural reforms, such as downsizing the carbon business and optimizing the Specialty Materials segment, aim to increase future profitability, potentially impacting earnings positively.
  
• Cost reduction efforts, targeting a 47 billion JPY annual reduction, contribute to income improvements that could boost overall earnings.
  
• The management's focus on enhancing corporate value and preparing a comprehensive mid
• to long-term policy could positively influence investor sentiment and lead to a boost in the stock's value, resulting in higher earnings per share (EPS).

Mitsubishi Chemical Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsubishi Chemical Group's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 3.4% in 3 years time.
• Analysts expect earnings to reach ¥165.7 billion (and earnings per share of ¥116.44) by about December 2027, up from ¥93.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥186.2 billion in earnings, and the most bearish expecting ¥113.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2027 earnings, down from 12.1x today. This future PE is lower than the current PE for the JP Chemicals industry at 22.3x.
• 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 8.8%, as per the Simply Wall St company report.

Mitsubishi Chemical Group Future Earnings Per Share Growth

Risks

• Intense competition in the carbon fiber and petrochemical markets, coupled with a projected delay in price recovery, may result in reduced revenues and tightened margins for Mitsubishi Chemical Group.
  
• The structural reform expenses and impairment losses, such as those associated with the downsizing and affiliate transfer in the carbon business, risk dampening net margins and impacting reported earnings negatively.
  
• Fluctuations in demand for display and semiconductor-related products, compounded by market adjustments, could result in decreased sales volumes and lower than expected revenue, especially in the Specialty Materials segment.
  
• A potential resurgence of inflationary effects, including higher fixed costs and labor costs, could offset operational efficiencies and cost reduction efforts, negatively impacting net operating income.
  
• Exchange rate volatility, as indicated by currency impacts on financial results, could adversely affect the group's reported revenues and earnings, making future projections uncertain.

Valuation

• The analysts have a consensus price target of ¥1053.0 for Mitsubishi Chemical Group 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 ¥1300.0, and the most bearish reporting a price target of just ¥770.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥4889.6 billion, earnings will come to ¥165.7 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.8%.
• Given the current share price of ¥794.0, the analyst's price target of ¥1053.0 is 24.6% 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.