LANXESS's Strategic Shift: Can Operational Gains Outweigh Near-Term Risks?

The global chemical industry has faced relentless headwinds over the past year—from raw material cost deflation to macroeconomic uncertainty. Amid this turbulence, LANXESS AG (ETR:LAN) has emerged as a paradox: a company that is simultaneously stabilizing its financials while navigating a high-risk, low-margin environment. Its Q1 2025 results, paired with strategic moves to reshape its portfolio, reveal a company at a critical inflection point. For investors, the question is clear: Does LANXESS's operational resilience and transformation justify its current undervalued status, or does near-term risk outweigh the potential rewards?

Q1 2025: A Foundation of Resilience

LANXESS's first-quarter performance underscored its ability to navigate a challenging landscape. Total sales held steady at €1.6 billion year-over-year, a testament to volume gains in its core segments—Consumer Protection (agrochemicals and disinfectants) and Advanced Intermediates (specialty chemicals for healthcare and electronics)—offsetting price declines in Specialty Additives, which struggled with weak construction demand.

But the real story lies in profitability. Group EBITDA pre-exceptionals surged 32% to €133 million, driven by LANXESS's “FORWARD!” cost-savings program and improved capacity utilization. Margins expanded to 8.3%, up from 6.3% in Q1 . Notably, Consumer Protection, a high-margin segment, saw its EBITDA margin jump to 14.2%, highlighting the benefits of LANXESS's pivot toward less cyclical, specialty-focused businesses.

The Urethane Systems Divestment: A Strategic Pivot

The sale of its Urethane Systems business to UBE Corporation in April 2025 marked LANXESS's final step toward becoming a “pure-play specialty chemicals” company. While this move eliminates a €400 million revenue stream (and a drag on margins), it also reduces debt by €500 million—critical for LANXESS, which carried €2.5 billion in net financial debt as of March.

The divestment's long-term impact is twofold:
1. Deleveraging: LANXESS aims to reduce leverage to 3x by end-2025 (from nearly 5x in recent years), paving the way for lower interest costs and potential shareholder returns.
2. Focus on High-Margin Segments: By shedding commodity businesses, LANX's Advanced Intermediates and Consumer Protection divisions—both with double-digit EBITDA margins—can grow without the weight of cyclical markets.

However, investors must acknowledge the near-term earnings hit. LANXESS reaffirmed its 2025 EBITDA guidance of €600–650 million, but this excludes the Urethane Systems contribution, meaning year-over-year comparisons will weaken.

Valuation: A Discounted Turnaround Story

LANXESS trades at a steep discount to its peers. Its EV/EBITDA multiple of 7.4x (based on 2024 LTM EBITDA) lags behind rivals like Akzo Nobel (8.5x) and Covestro (7.9x), while its negative P/E ratio reflects lingering losses from past cyclical downturns.

But the story changes when factoring in LANXESS's turnaround roadmap:
- Cyclical Recovery: Capacity utilization rose to 67% in 2024 from 58% in 2023, signaling a recovery in demand for its specialty chemicals.
- Debt Reduction: Proceeds from the Urethane Systems sale and Envalior's put option (a 41% stake in a joint venture with Lanxess, exercisable from 2026) could unlock up to €860 million by 2027, further de-risking the balance sheet.
- Margin Targets: LANXESS aims for EBITDA margins of 10%+ by 2028, achievable if its specialty segments continue outperforming.

Risks and Near-Term Hurdles

• Macroeconomic Uncertainty: U.S. trade policies and weak construction demand (a key market for Specialty Additives) could delay LANXESS's recovery.
• Execution Risk: The “FORWARD!” program's savings must materialize, and Envalior's valuation hinges on its performance.
• Valuation Catch-Up: Peers' multiples may not expand as hoped if broader chemical sector sentiment weakens.

Investment Thesis: A Long-Term Play

LANXESS is a classic “turnaround” story: its valuation is deeply discounted, but success hinges on execution over the next 18–24 months. Key catalysts include:
1. Debt Reduction: Watch for net debt to drop below €2 billion by end-2025, signaling financial stability.
2. Margin Expansion: Achieving 10%+ EBITDA margins by 2028 would validate its specialty strategy.
3. Envalior Monetization: The put option's exercise in 2026 could unlock value not yet reflected in the stock.

At current levels (~€24/share), LANXESS offers significant upside potential. A base-case scenario of 6x EV/EBITDA on €900 million EBITDA by 2028 implies a €50 price target. An upside case (7–8x multiples) could push shares to €60–€70. Even conservative estimates suggest 50–75% upside, excluding Envalior's value.

Conclusion: A Buy with a Long View

LANXESS's Q1 results and strategic moves demonstrate that its transformation is on track. While near-term headwinds—such as lower Urethane Systems contributions and macroeconomic uncertainty—will keep earnings volatile, the company's focus on high-margin segments and deleveraging creates a compelling long-term case. For investors willing to overlook short-term noise, LANXESS's valuation and turnaround momentum make it a buy for a 3–5 year horizon, with the caveat that execution risks remain elevated.

Recommendation: Buy LANXESS with a hold period of 3+ years, targeting a 2028 valuation rerating. Monitor debt reduction and margin progress closely.