The ending of a positive pricing delta

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.

Green targets kick off the next investment cycle

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).

Solutions & Specialties become weak

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%).

It could have been better...

… 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.

Availability makes the price

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.

Being on the sunny side

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.

Capital increase around the corner?

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.

The Closing of the pricing delta

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.

Some show of force

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.

Synergies to smoothen the acquisition's valuation

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

Somewhat better than feared

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.

Shortsighted or too cautious?

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.

Stabilisation or trough quarter?

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.

Some stabilisation in Q2?

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.

Virus-driven adjustments: not a good 2020

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.

Renold - Strong end to FY24: EPS up 11%. Robust FY25: EPS up 27.6%

The FY24 year-end update is very upbeat signalling trading being materially ahead of expectations, with a better-than-expected profit out turn and stronger cash generation. It continues to strengthen margins through efficiencies and investment in modern equipment. The order book remains close to record levels providing a robust view of future forecasts. In FY24E we upgrade EPS by 11% and in FY25E a significant upgrade of 27.6%. It looks capable of declaring a dividend in FY25 as well as manageme

Q1 Operating Results

Another Good Year of Diversified Growth with More to Come in 2024 CCapital have released their Q1 operating results. Overall, revenue has come in slightly lower than expected at $80.2m vs TamE of $85.9m but is largely tracking in line with our FY24 annual estimate and we note the company has maintained guidance. Drilling revenue for this quarter was impacted by a fall in utilisaztion rates as well as general remobilisation geographically but we expect a strong recovery throughout the year as k

Billington Holdings - Record result boosts dividend; forecasts upgraded

FY23 results show very strong growth over FY22, driven by strong Structural Steel activity, with results slightly ahead of upgraded profit expectations, while stronger than expected cash flow resulted in an unexpectedly generous dividend of 33p (offering a FY23 yield of 7.0%). The group now has net cash of £22.1m and is debt free and is therefore in a strong position for potential M&A activity. Following the recent £90m of new orders to increase the order book to record levels we conservatively

Morning Note – 16 April 2024

Plant Health Care - China distribution with AMVAC

Plant Health Care announced it has signed a distribution agreement with AMVAC, an American Vanguard Company, to support commercialisation of novel fertiliser products incorporating Plant Health Care's Harpinαβ in China starting in 2024. The novel product combines Harpinαβ technology with an AMVAC fertiliser and is expected to help growers improve crop quality and yield as part of an integrated and environmentally responsible crop production programme. AMVAC continues to evaluate Plant Health Car

Morning Note – 15 April 2024

discoverIE - Back to organic growth

discoverIE’s March year-end update confirms a strong operational performance in challenging markets. Following two years when sales increased by +48%, FY 2024 Group sales were +1% ahead of 2023 at CER (reported -3%) driven by a +2% contribution from acquisitions and organic -1%. As expected, organic growth returned in the later part of the year (Q4 +2%, +11% sequentially) and the order book has reverted to normalised levels of c.4.5 months’ sales, which – combined with a continuing strong pipeli

Severfield - Multiple positives should excite investors

Severfield’s trading update indicates that FY23 results are expected to slightly exceed market expectations and the company ends the year with a record UK and Europe order book. Furthermore, with a positive trading outlook and net debt coming in lower than expected, Severfield has announced a £10m share buyback, highlighting the cash-generative nature of the company and management’s confidence in its position. The stock trades on an FY25 P/E of less than 6x and yields 7%, which we believe appear

Warns on brine supply costs

SP Angel . Morning View . Copper prices hold higher as China processing fees fall below $0/t amid low feedstock availability

PROGRESSIVE: Severfield: Targeted acquisition strategy aids growth path

Acquisitions have been an important element of Severfield management’s growth strategy, with the aim of adding new products, sectors and regions to what we have identified as exciting long-term organic opportunities. In this Spotlight report, we focus on the group’s targeted M&A approach, highlighting three significant deals.

Hardman & Co Insight: 2023 was an annus horribilis for Quoted UK Infrastructure and Renewable Energy

The focus of Hardman & Co Research is on the nine quoted Infrastructure Investment Companies (IICs) and on the 22 Renewable Energy Infrastructure Funds (REIFs): the stocks analysed are all members of the Association of Investment Companies (AIC). We are updating our publication of January 2023, assessing both the lacklustre share price performances during 2023 and the key issues, including interest rates, inflation and power prices. As a 31-strong group, its combined market capitalisation is no

LIBERUM: Severfield: Erratum: Better EPS and cashflow, and buyback

Invinity Energy Systems - Update on Strategic Investment

Invinity’s update on discussions with strategic investors reveals interest from multiple parties. While this has slightly delayed finalising an agreement it increases the potential for a better outcome. Although details are unknown at this stage, we think there is enough in the statement to be comfortable that any agreements will be consistent with the company’s strategy of growing market share in core markets and using a licencing and royalty model in other markets.

Clean and competitive fertiliser