Advancements In Chemical Recycling And Bio-Materials Will Strengthen Competitive Edge

Key Takeaways

• Restructuring and focus on high-value products are expected to enhance cost efficiency and profitability, positively impacting net margins.
  
• Strategic investments in sustainability and key growth sectors like battery materials and drug development aim to boost revenue and secure future growth.
  
• Declining sales and high debt, compounded by uncertainties in petrochemical markets and global EV demand, could hurt LG Chem's financial health and future growth.

Catalysts

Engages in the petrochemicals, energy, advanced materials, and life science businesses in Korea, China, Asia/Oceania, the United States, Europe, and internationally.

• LG Chem's restructuring and streamlining efforts, especially in marginal operations and non-core commodity lines, are expected to improve cost efficiencies and enhance profitability, impacting net margins positively.
  
• Expansion into high value-added and differentiated product lines within each business division is anticipated to drive revenue growth and potentially improve net margins by focusing on higher profitability sectors.
  
• The emphasis on sustainability with advancements in chemical recycling and bio-materials aims to strengthen LG Chem's competitive edge and drive future growth, boosting revenue and net margins.
  
• LG Chem's strategic investments and focus on key growth drivers like North American battery materials production and new drug development are likely to support earnings growth through increased revenue streams.
  
• Rigorous cost-reduction initiatives and optimized resource allocation are expected to sustain financial soundness and improve net margins over the long term.

LG Chem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LG Chem's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.5% today to 4.9% in 3 years time.
• Analysts expect earnings to reach ₩3290.0 billion (and earnings per share of ₩42849.79) by about March 2028, up from ₩-248.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩7449.0 billion in earnings, and the most bearish expecting ₩919.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from -75.0x today. This future PE is greater than the current PE for the KR Chemicals industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.87%, as per the Simply Wall St company report.

LG Chem Future Earnings Per Share Growth

Risks

• The significant decrease in sales of LG Energy Solutions and Advanced Materials, and the sluggish petrochemical market, led to an 11% year-over-year drop in annual sales revenue and a decline in operating profit, which could continue to impact future earnings negatively.
  
• The company's high debt ratio, which recorded an increase to 95.6% year-over-year, suggests a potential strain on financial health and could impact future net margins and financial stability.
  
• The persistent oversupply in the petrochemical sector, coupled with the delayed economic recovery in China, could prolong operating losses in this division, thus affecting overall operating margins and revenues.
  
• Weak global EV demand and ongoing inventory adjustments present risks to the LG Energy Solutions division, potentially leading to continued operating losses and affecting overall earnings growth.
  
• Political uncertainty, such as policy changes under Trump 2.0 and potential tariffs, could introduce volatility and impact demand, especially in EV-related sectors, thus potentially impacting sales revenue and market growth.

Valuation

• The analysts have a consensus price target of ₩354777.778 for LG Chem 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 ₩530000.0, and the most bearish reporting a price target of just ₩275000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩66687.5 billion, earnings will come to ₩3290.0 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of ₩238000.0, the analyst price target of ₩354777.78 is 32.9% 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.