SiC And Carbon Fiber Restructuring Will Secure A Bright Future

Key Takeaways

• Restructuring and strict cost management in the Carbon Fiber business aim to enhance profitability and optimize EBITDA and net margins.
  
• Focus on high-margin services and project acquisitions in the Process Technology unit promises significant profitability improvements and bolsters future earnings.
  
• Challenges in the EV market, Carbon Fiber restructuring, competition, and weakening semiconductor demand threaten SGL Carbon's revenue and earnings stability.

Catalysts

Engages in the manufacture and sale of special graphite, carbon fibers, and composite products in Germany, rest of Europe, the United States, China, rest of Asia, and internationally.

• The restructuring of the Carbon Fiber business, including the closure of unprofitable sites, is intended to improve profitability by focusing on the profitable core of the business, which could eventually positively impact earnings and net margins.
  
• Strict cost management measures have been implemented, including optimizing headcount and reducing indirect spending. These actions are intended to safeguard and potentially enhance EBITDA margins and net margins in the near term.
  
• Process Technology business unit's continued focus on high-margin service offerings and successful acquisition of large-scale projects have led to significant profitability improvements, which could bolster future earnings and margins.
  
• The long-term importance and eventual recovery of the SiC market, bolstered by continued implementation in other markets beyond EVs, presents an opportunity for revenue growth and improved margin stability once current market slowdowns resolve.
  
• Despite challenges in the Carbon Fiber and Composite Solutions segments, the adaptation to changing customer demands and market conditions should help SGL Carbon maintain cash flow positivity, which supports ongoing operations and financial health reflected in net debt and equity ratios.

SGL Carbon Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming SGL Carbon's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.4% today to 8.7% in 3 years time.
• Analysts expect earnings to reach €74.1 million (and earnings per share of €0.36) by about June 2029, up from -€67.2 million today.
• 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 8.6x on those 2029 earnings, up from -8.3x today. This future PE is lower than the current PE for the GB Electrical industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 3.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

Risks

• The sluggish development in the electric vehicle (EV) market and the resulting slowdown in demand for silicon carbide products could significantly impact SGL Carbon's future revenues and profitability.
  
• The restructuring of the Carbon Fiber business unit, which involves closure of unprofitable sites and a significant one-time cash effect of €50 million, presents financial risks that could negatively affect the company's earnings in 2025 and 2026.
  
• Declining sales and global overcapacity in the Carbon Fiber market, with increased competition from Chinese suppliers creating negative price trends, are likely to impact revenue and net margins adversely.
  
• The termination of a profitable automotive contract in the Composite Solutions business unit has already caused a revenue decline and may continue to affect the unit's future earnings, as it represents a new baseline for sales without that contract.
  
• The weakening of the semiconductor market and dependence on uncertain recovery in EV sales presents a risk to achieving projected revenue growth, which could lead to earnings volatility if the anticipated recovery does not materialize in the second half of 2025.

Valuation

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

• The analysts have a consensus price target of €4.64 for SGL Carbon 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 €5.0, and the most bearish reporting a price target of just €4.05.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €851.7 million, earnings will come to €74.1 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 8.8%.
• Given the current share price of €4.56, the analyst price target of €4.64 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.