Green Transition And Trade Measures Will Drive Strong Upside For This Materials Leader

Catalysts

About Elkem

Elkem is a global supplier of advanced silicon based materials, carbon solutions and silicones that enable critical applications in industries such as automotive, construction, aluminum, steel and energy.

What are the underlying business or industry changes driving this perspective?

• Acceleration of the green transition and tighter CO2 regulation are increasing demand for low emission materials. Elkem's long term renewable hydropower contracts, low carbon footprint and strong ESG ratings position it to compete for share and potentially achieve better pricing, which could support higher revenue and improved net margins.
• Structural growth in specialty silicon products such as Microsilica and foundry alloys, which have shown stable high margins over decades and are used in infrastructure, well drilling and advanced polymers, may progressively shift the mix away from commoditized volumes, supporting higher group EBITDA margins and earnings resilience.
• Expansion of bio based and more environmentally friendly carbon products for aluminum and metallurgical customers, already used in more than 15,000 aluminum cells and gaining market share, can deepen customer lock in and help justify premium pricing, supporting revenue growth and margin stability in Carbon Solutions.
• Potential trade defense and safeguard measures in the EU and U.S., combined with Elkem's position as a low cost western producer with competitive energy contracts, create an opportunity for higher realized prices and utilization at its Norwegian and Icelandic plants, which could improve operating income and earnings from currently depressed levels.
• Ongoing cost optimization, yield improvements and production campaigning in the most competitive furnaces, together with reduced CO2 quota costs after equal treatment with EU peers, may structurally lower the cost base, supporting margin expansion and faster deleveraging even if price recovery is modest.
• Portfolio optimization through the strategic review and planned sale of the Silicones division, where a new industrial owner values the specialty platform and modern assets, could unlock capital for debt reduction and focused growth in the segments management views as highest return, supporting improvements in return on capital and earnings per share over time.

Assumptions

This narrative explores a more optimistic perspective on Elkem compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Elkem's revenue will grow by 41.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.9% today to 6.9% in 3 years time.
• The bullish analysts expect earnings to reach NOK 3.3 billion (and earnings per share of NOK 5.14) by about December 2028, up from NOK 485.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NOK1.8 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, down from 36.5x today. This future PE is lower than the current PE for the NO Chemicals industry at 22.8x.
• The bullish 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 7.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent global overcapacity and weak demand in silicon, ferrosilicon and commodity silicones, particularly in China and Europe, could keep reference prices at or near historical lows for longer than expected. This would cap revenue growth and prevent the anticipated expansion in net margins and earnings.
• Reliance on trade barriers and safeguard measures to improve market conditions introduces regulatory risk. Unfavorable outcomes in EU safeguards or U.S. countervailing duty processes, including the 16.87% preliminary duty on Norwegian silicon, could erode Elkem's cost advantage, limit market access and pressure revenue and EBITDA margins.
• Elkem’s leverage is already above target with a debt leverage ratio of 3.1 times EBITDA and rising net interest-bearing debt. If weak pricing and volumes persist, the company’s ability to deleverage as planned after the silicones divestment could be constrained, weighing on net income and earnings per share through higher finance costs and limited strategic flexibility.
• The silicones division still has significant exposure to commoditized products in structurally oversupplied markets, especially in China. If competitive price pressure offsets cost improvements and volume growth, the division’s contribution will remain volatile and drag on group EBITDA margins and earnings stability.
• End markets such as automotive, construction, steel and ferroalloys are experiencing structurally weak or uneven growth outside China. If demand in these sectors fails to normalize or shifts toward lower intensity use of Elkem’s products, it could structurally limit volume growth and pricing power, constraining revenue, EBITDA and long term earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Elkem is NOK35.0, which represents up to two standard deviations above the consensus price target of NOK31.0. This valuation is based on what can be assumed as the expectations of Elkem's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK35.0, and the most bearish reporting a price target of just NOK23.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be NOK47.5 billion, earnings will come to NOK3.3 billion, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of NOK27.9, the analyst price target of NOK35.0 is 20.3% 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.