Optimizing Assets And Expanding ESS Production Will Secure Success

Key Takeaways

• Strategic acquisitions and partnerships are enhancing operational efficiency and expanding market presence, optimizing assets and aligning with regulatory demands.
  
• Localization and diversification into North American production and new battery technologies aim to capture growth opportunities and stabilize long-term revenue.
  
• Declining North American EV demand, high CapEx, and geopolitical risks challenge LG Energy Solution's revenue growth and financial stability.

Catalysts

Provides energy solutions worldwide.

• The strategic acquisition and reallocation of existing capacity (such as the JV with GM at the Lansing site) is expected to optimize asset utilization, reduce CapEx requirements, and streamline production timelines, potentially improving future operational efficiency and margins.
  
• The focus on expanding the North American ESS production capacity and capturing new orders, driven by local production advantages, positions LG Energy Solution to benefit from growth in the ESS market, likely boosting future revenue and reducing reliance on volatile EV demand.
  
• The diversification into new product areas, such as the 46-series battery form factor and the development of high-power cells for robotics and drones, is part of a strategy to tap into new revenue streams and mitigate potential demand fluctuations in the EV market.
  
• The establishment of strategic partnerships, such as the battery recycling JV in Europe and grid projects in Poland, aims to strengthen LG Energy Solution's position in emerging sectors and compliance with regional regulations, which may enhance long-term earnings stability.
  
• The preemptive localization of the supply chain and battery production, especially in North America, provides a competitive edge amid shifting tariff policies and trade barriers, potentially safeguarding revenue and profit margins against escalating costs associated with foreign supply dependencies.

LG Energy Solution Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LG Energy Solution's revenue will grow by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.0% today to 7.1% in 3 years time.
• Analysts expect earnings to reach ₩2955.4 billion (and earnings per share of ₩11985.37) by about May 2028, up from ₩-1018.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩4845.0 billion in earnings, and the most bearish expecting ₩1780.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.5x on those 2028 earnings, up from -74.5x today. This future PE is greater than the current PE for the KR Electrical industry at 21.7x.
• 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 8.8%, as per the Simply Wall St company report.

LG Energy Solution Future Earnings Per Share Growth

Risks

• The decline in North American EV demand due to heightened tariffs and resulting volatility could negatively impact LG Energy Solution's revenue streams and overall sales.
  
• The challenges in forecasting demand and the potential for further policy changes could lead to conservative inventory management by OEMs, potentially affecting LG Energy Solution's revenue and profitability.
  
• High capital expenditures, coupled with reduced CapEx guidance by 20-30%, and the possibility of further slowdowns in demand could impact the company’s future revenue growth and net margins.
  
• The decision to curb new capacity investments and maximize existing site efficiencies to counter expected demand fluctuations could hinder the company's revenue growth potential.
  
• Potential overreliance on key markets like the U.S., amid increasing competitive pressures and geopolitical risks, could undermine LG Energy Solution's revenue diversification and financial stability.

Valuation

• The analysts have a consensus price target of ₩416793.067 for LG Energy Solution 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 ₩531000.0, and the most bearish reporting a price target of just ₩239000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩41490.0 billion, earnings will come to ₩2955.4 billion, and it would be trading on a PE ratio of 42.5x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of ₩324500.0, the analyst price target of ₩416793.07 is 22.1% 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.