Divestment Of Silicones Division Will Streamline Business And Focus Investments

Key Takeaways

• Strategic review of the Silicones division could focus investment, improving revenue and earnings in Silicon Products and Carbon Solutions.
  
• Expansion projects and sustainable initiatives are expected to boost operational efficiencies, ESG profile, and investor interest, enhancing margins and earnings.
  
• Strategic review of the Silicones division risks revenue stability amidst weak market demand and geopolitical tensions, impacting Elkem's financial flexibility and market positioning.

Catalysts

Engages in the provision of advanced material solutions worldwide.

• The strategic review and potential divestment of the Silicones division could allow Elkem to streamline its business, resulting in more focused investment in the Silicon Products and Carbon Solutions divisions, which could enhance revenue growth and improve earnings.
  
• The completion of expansion projects in China and France for the Silicones division are expected to yield future operational efficiencies and capacity improvements, impacting net margins positively.
  
• Elkem's initiatives to reduce CO2 emissions and develop sustainable projects could enhance the company's ESG profile, potentially attracting new investors, thus positively impacting revenue and earnings.
  
• Securing long-term power contracts at competitive rates in Norway can reduce operational costs and improve net margins in the energy-intensive Silicon Products division.
  
• Elkem's focus on geographic diversification and regionalized value chains can mitigate risks from global trade tensions and enhance stable revenue growth opportunities.

Elkem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elkem's revenue will grow by 30.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.4% today to 6.2% in 3 years time.
• Analysts expect earnings to reach NOK 2.4 billion (and earnings per share of NOK 3.82) by about March 2028, up from NOK 2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK3.0 billion in earnings, and the most bearish expecting NOK1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 7.0x today. This future PE is lower than the current PE for the NO Chemicals industry at 20.9x.
• 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 8.4%, as per the Simply Wall St company report.

Elkem Future Earnings Per Share Growth

Risks

• The strategic review and potential divestment of the Silicones division could introduce transitional risks and uncertainties, which may impact Elkem's future revenue stability and strategic focus.
  
• The ongoing weak market conditions, particularly in the construction and automotive sectors in China, as well as the overcapacity issues in the Silicones market, may continue to pressure sales prices, affecting revenue and margins.
  
• Trade tensions and potential tariffs present geopolitical risks that could disrupt regional market operations, possibly influencing revenue forecasts and pricing strategies across the company's supply chain.
  
• The weak demand in key markets, like Aluminum and ferrosilicon in the steel industry, could lead to lower sales volumes, impacting the overall revenue and profit growth potential.
  
• The necessity for large future investments in Silicones to maintain its market position could strain financial resources if Elkem retains the division, impacting net margins and the availability of capital for other strategic initiatives.

Valuation

• The analysts have a consensus price target of NOK26.2 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 NOK20.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK39.3 billion, earnings will come to NOK2.4 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 8.4%.
• Given the current share price of NOK22.34, the analyst price target of NOK26.2 is 14.7% 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.