HPOL B: Mergers And CO2 Reduction Progress Will Drive Momentum

Key Takeaways

• Expansion in advanced polymers, thermoplastics, and TPEs aligns with key industry megatrends, sustainability demands, and growing end-markets, supporting revenue and pricing power.
  
• Operational efficiency, sustainability focus, and strategic acquisitions are set to boost margins, earnings resilience, and market share through diversification and integration.
  
• Overexposure to declining markets, rising input costs, margin pressure, shifting sustainability trends, and intensifying competition could structurally threaten future growth and profitability.

Catalysts

Develops, manufactures, and sells various polymer compounds and engineered gaskets, seals, and wheels in Sweden, rest of Europe, the United States, rest of the Americas, and Asia.

• Heightened demand for advanced polymer compounds in wire & cable, medical, and construction segments-driven by global electrification, infrastructure investment, and sustainability requirements-positions HEXPOL to accelerate revenue growth as these end-markets expand and benefit from long-term megatrends.
  
• The company's focus on growing thermoplastic and TPE (Thermoplastic Elastomer) product areas is set to capture new growth opportunities aligned with EV adoption, energy transition, and regulatory demands for lightweight, recyclable materials, supporting both top-line expansion and higher average selling prices.
  
• Rising customer interest in recycled products and HEXPOL's commitment to sustainability-evidenced by a high number of recycling projects with automotive OEMs-allows HEXPOL to command premium pricing and capture market share, potentially leading to margin improvement and more resilient earnings.
  
• Continued operational efficiency enhancements, combined with consolidation of recent acquisitions (Kabkom, Piedmont), are expected to drive gross margin gains and synergistic earnings growth as production costs are optimized and the revenue base diversifies geographically and by end-market.
  
• Strong balance sheet and a robust acquisition pipeline position HEXPOL to capitalize on industry consolidation; well-executed M&A in niche or high-growth areas can accelerate revenue, bolster market share, and provide additional levers for long-term earnings growth.

HEXPOL Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming HEXPOL's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 10.7% in 3 years time.
• Analysts expect earnings to reach SEK 2.2 billion (and earnings per share of SEK 6.23) by about June 2029, up from SEK 1.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK1.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.3x on those 2029 earnings, up from 13.6x today. This future PE is lower than the current PE for the GB Chemicals industry at 23.8x.
• 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 5.74%, as per the Simply Wall St company report.

Risks

• Persistent weakness in organic sales, particularly in the North American and Automotive segments, raises concerns about overexposure to declining ICE vehicle platforms and broader demand uncertainty, which could structurally depress future revenues and limit top-line growth.
  
• High uncertainty linked to U.S. trade policy and volatile tariffs on raw materials introduces ongoing risk of input cost inflation and potential supply disruption, threatening future net margins if HEXPOL is unable to fully pass these through to customers.
  
• A less profitable product mix and higher OpEx in relation to lower sales, as seen this quarter, signal potential ongoing margin compression, especially if HEXPOL fails to accelerate revenue diversification into higher-margin segments, impacting net earnings.
  
• Despite a stated focus on sustainability and recycled products, the company faces long-term risk if industry-wide adoption of circular economy principles and reduced single-use plastics structurally shrink the addressable market for synthetic rubber compounding, threatening future revenue and profit pools.
  
• Competitive threats from low-cost regional players and larger global conglomerates could intensify as the industry consolidates and technological innovation shifts market demand toward advanced, bio-based, or high-performance materials, undermining HEXPOL's pricing power and future margins.

Valuation

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

• The analysts have a consensus price target of SEK82.0 for HEXPOL based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK20.4 billion, earnings will come to SEK2.2 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 5.7%.
• Given the current share price of SEK72.95, the analyst price target of SEK82.0 is 11.0% 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.