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Covestro has benefited from its strong pricing power by surfing ahead of the cost curve. This has come to an end and the future does not look so bright. Global GDP growth is now seen -1pp lower (at +3.1%) with significantly lower demand from automotive and furniture. In essence, this has lowered Convestro’s mid-point 2022 EBITDA guidance by -18% to €2,250m, whereas the consensus stands at €2,703m (-17% downward revision potential.
Companies: Covestro AG
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Covestro has entered, like its chemical peers, the climate neutrality path and plans for GHG emission neutrality by 2035. The company has a clear picture about the (operating) costs and other effects resulting from the transformative measures. Our estimates were basically spot on at the profitability line (€9m beat), but the beat was quite substantial at the sales line (+21%). Consensus was missed by -1.3% (sales) and -1.2% (EBITDA).
Timing is everything. The implementation of the new reporting structure unfolded Solutions & Specialties’ weak margin due to soaring raw material prices. We understand that measures should start on a particular date but why the change of reporting was implemented in the middle of a business year remains unclear to us. Covestro’s Q3 figures came in a notch below our strong expectations, whereas consensus was beaten (top line: +9.4%; EBITDA: +0.9%).
… as shortages held volumes somewhat back, but organic growth was extremely good. The recently-acquired RFM business made some additional contributions. Covestro faced a more than favourable business environment, which allowed strong price increases on the back of higher volumes. This will have a positive impact and management has already lifted its FY guidance and supports the FY performance.
As already announced, Covestro is in the driver’s seat when it comes to pricing. This has an immediate effect on its profitability as COGS did not move much despite a strong pickup in core volumes. Against this background, management strongly lifted its FY profitability guidance by >+25%, which seems to be founded on the continuation of the good performance in Q2, which might sequentially be a bit more moderate. Management’s view broadly fits into our picture.
Finally, the pendulum has swung back and the pricing delta has become positive, pushing profitability in Q4. PUR, as the main driver, benefited from the tight market conditions in a favourable demand situation. FY figures met our expectations as well as consensus. Management gave a strong FY 2021 guidance based on profitability’s head start in Q1.
Covestro benefited from the strong pick-up in demand in Polyurethanes and Polycarbonates, which fostered the positive EBITDA margin development in Q4. This development did not comet fully out of the blue, but was stronger than expected from us as well as consensus. We assume, management will take the chance to conduct at short notice an additional capital increase partly to finance the acquisition of DSM’s Resins & Functional Material business.
Covestro had already reported preliminary figures earlier this month and raised guidance to the upper end based on the assumption that an expected second wave will not trigger spring-like lockdowns. This report provided some more details and confirmed the narrowing of the pricing delta.
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Covestro clearly benefited from a business recovery but, additionally, cost cutting added to the better than expected profitability. Furthermore, the pricing delta seems to have narrowed further. The preliminary figures were above our cautious expectations.
Covestro, like Lanxess, acquired a former DSM business, but with a real premium. The valuation of the resins business looks more like in the lower semiconductor ‘space’ than on the construction ‘floor’. The expected synergies are expected to nearly double the business’s profitability. Financing of the €1.6bn deal will be challenging against the background of the current situation. We understand the strategic fit of the acquisition, which strengthens CAS’s existing portfolio and provides access
Covestro’s management has done good work by managing investors’ expectations, somewhat helped by the release of preliminary figures. The latter had already guided for a notch better than expected profitability and was better than feared by consensus. The impact from lower prices and volumes pushed Polyurethanes into red territories, whereas Polycarbonates was the hidden gainer as shielding became a driving factor in the pandemic.
We still have not made up our minds and it will be quite challenging to come to a conclusion without additional information. Nevertheless, the preliminary figures guide to a stronger than expected Q2. Even profitability was far better but, without additional details, it is quite difficult to see where the performance stems from. Preliminary figures were marginally above our estimates, but beat consensus at the profitability level.
Covestro’s management gave some further insights on Q2 developments during its virtual sellside round table. Having gone 2/3rds through the second quarter, management indicated some recovery was to be seen in its core volumes in June having looked into the order book. Management’s recovery scenario is based on getting back to the pre-crisis GDP level in 2023, which is rather more moderate than our picture but does not force us to take immediate action.
Having already provided some preliminary Q1 figures, management appears to be guiding for some stabilisation of one of its core indicators, the core volume. Like other (chemical) companies, Covestro has implemented security measures as well as cash-preserving measures to deal with the pandemic. In the publication of the Q1 preliminary figures, management prepared the ground for some additional measures, but it seems to have become more confident that the already implemented ones are sufficient.
Covestro reduced its profitability expectation by €300m against a background of quite good Q1 preliminary figures, giving our previous cautious view quite an optimistic tone. Management is enforcing stronger cash-saving measures and flags additional adjustments if a recovery in current situation does not start in Q3 20.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Covestro AG. We currently have 21 research reports from 3 professional analysts.
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