European Decarbonization And Indonesian Rivals Will Erode Margins

Key Takeaways

• Accelerated decarbonization, new material adoption, and lack of trade protections threaten Aperam's core revenues, market share, and profit margins.
  
• Rising environmental costs, overcapacity, and price competition are expected to further pressure earnings and undermine long-term financial resilience.
  
• Diversification, operational efficiency, and exposure to high-growth markets position Aperam for earnings resilience and future revenue growth amid shifting global demand and industry trends.

Catalysts

Produces and sells stainless steel and alloy products worldwide.

• Despite expectations of growth from infrastructure spending and urban development in Europe, Aperam faces the risk of accelerated global decarbonization requirements which could decrease demand for traditional stainless and specialty steel products, threatening core revenues and casting doubt on long-term revenue growth.
  
• The lack of tightening and targeted trade protections for stainless steel in Europe, alongside increased global trade tensions and protectionism, exposes Aperam to increased competition from low-cost producers, particularly Indonesia, and could erode market share and further pressure margins in its largest markets.
  
• Advances in material sciences and the rapid adoption of lighter substitutes such as composites and advanced polymers in the automotive, aerospace, and construction sectors pose a significant threat to Aperam's addressable market, likely resulting in volume declines and gross profit compression over time.
  
• Ongoing overcapacity in the European stainless steel market and insufficient market consolidation will likely perpetuate price-based competition, further compressing net margins and reducing EBITDA resilience even if temporary boosts arise from regions like Brazil or specialty alloys.
  
• Mounting environmental compliance and emissions-related requirements in Europe, combined with rising energy costs resulting from a transition to renewables, are expected to increase Aperam's operational expenditures, placing downward pressure on net operating income and exposing the company to risks of failing to meet long-term green premium opportunities.

Aperam Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Aperam compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Aperam's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.7% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach €249.5 million (and earnings per share of €3.43) by about July 2028, up from €232.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the GB Metals and Mining industry at 15.3x.
• 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 6.93%, as per the Simply Wall St company report.

Aperam Future Earnings Per Share Growth

Risks

• Aperam's diversified global footprint, especially strong performance and protection measures in the Brazilian market, continues to provide stable EBITDA and helps offset ongoing European weakness, sustaining cash generation and earnings resilience.
  
• The Universal acquisition and increased exposure to strategic US alloys and aerospace markets create new synergy opportunities, particularly if aerospace and defense spending returns, which would provide upside to EBITDA and long-term revenue.
  
• Early indicators of recovery in key end markets such as European construction, along with potential stimulus from large-scale infrastructure plans in Germany, point to future demand rebound and thus upside for revenue and margins.
  
• Continued improvements in operational efficiency, inventory management, and synergy realization, especially through best practices applied to US operations, are likely to enhance Aperam's cost competitiveness and support net margin expansion.
  
• Secular tailwinds from global decarbonization, electrification, and increased demand for specialty alloys (linked to EVs, energy, and urbanization) align with Aperam's specialty product and recycling investments, suggesting further growth in addressable markets and supporting long-term earnings growth.

Valuation

• The assumed bearish price target for Aperam is €25.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Aperam's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €37.0, and the most bearish reporting a price target of just €25.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €7.4 billion, earnings will come to €249.5 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of €28.32, the bearish analyst price target of €25.0 is 13.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.