Carbon Capture Initiatives Will Strengthen ESG Positioning And Brand Value

Key Takeaways

• Expansion in China and targeted operational improvements aim to boost EBITDA, enhancing revenue and earnings growth.
  
• Strategic geographic diversification and carbon capture efforts strengthen market positioning and long-term earnings stability.
  
• Weak market conditions and reliance on cost-cutting pose risks to revenue stability and profit margins amidst overcapacity and competitive pricing pressures.

Catalysts

Engages in the provision of advanced material solutions worldwide.

• The expansion project in China is anticipated to enhance sales volume and operational improvements, contributing to EBITDA growth. This operational expansion is likely to positively impact revenue and earnings in the upcoming quarters.
  
• The company's strategic focus on dual-play growth and green leadership aims for an average top-line growth of over 5% across all divisions and geographies, which could drive an increase in future revenues.
  
• The ambition to achieve significant operational improvements in Silicones, with an EBITDA rise of NOK 1.5 billion this year, indicates targeted internal efficiencies and cost reductions, likely boosting net margins and earnings.
  
• Elkem's involvement in carbon capture projects and the Sicalo project for CO2 emission reductions could position the company favorably in the ESG arena, potentially enhancing brand value and long-term earnings stability.
  
• Geographic diversification, particularly in light of Elkem’s ability to channel sales to the U.S. market, could mitigate risks tied to global trade tensions and support stable revenue streams in fluctuating demand environments.

Elkem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elkem's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 9.0% in 3 years time.
• Analysts expect earnings to reach NOK 3.5 billion (and earnings per share of NOK 5.51) by about February 2028, up from NOK 46.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, down from 304.1x today. This future PE is lower than the current PE for the NO Chemicals industry at 304.1x.
• 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 8.75%, as per the Simply Wall St company report.

Elkem Future Earnings Per Share Growth

Risks

• Weak market conditions, particularly in China and the silicones market, could suppress sales and limit the ability to increase prices, thus affecting future revenue growth.
  
• Overcapacity in silicones and silicon products, especially in China, may perpetuate a competitive pricing environment, constraining profit margins.
  
• Lower sales volumes in certain divisions, notably Carbon Solutions, due to weak market demand in key industries like steel and aluminum, could significantly impact revenue and earnings.
  
• Heavy reliance on cost-cutting and internal efficiency improvements for profit growth in a weak market environment suggests potential vulnerability to an economic downturn, which could impact net margins.
  
• The reliance on government support for carbon capture initiatives and investments in green technology introduces uncertainty and potential strain on financial resources, impacting future earnings stability.

Valuation

• The analysts have a consensus price target of NOK24.417 for Elkem 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 NOK30.0, and the most bearish reporting a price target of just NOK20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK39.1 billion, earnings will come to NOK3.5 billion, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of NOK22.06, the analyst price target of NOK24.42 is 9.7% 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.