We see management’s actions and the reference to its achievements of the measures made on the portfolio as a bit disconnected. On one hand, Lanxess has great liquidity in a crisis situation since the spin-out from Bayer and, on other hand, it highlighted a more balanced portfolio and lower exposure to the automotive industry. However, it was a smart move to sponge up cash.
The Q1 figures came in above our expectations and beat the street’s estimates.
Against the background of the looming COVID-19-driven panic, the Saudi Arabian show-of-force and a rising likelihood of a global recession, we believe Lanxess’s 2020 guidance does not include all the negative impacts as some are really quite recent. We appreciate management’s efforts to guide for potential COVID-19 effects. Lanxess’s figures came in fully in line with our operational expectations, especially on the profitability levels that we were focusing on. Consensus was partly beaten and it looks as if the Leather business was still included.
Lanxess seems to have left the path of strong cyclicality and the respective impact on profitability. Nevertheless, the company could not completely decouple from the economic environment as Engineering Materials recorded lower margins. Reported figures were stronger than expected, especially on the profitability line, but full matched the street’s expectations.
Back in 2014, prior to Mr Zachert taking over, the current harsh environment would have had a significantly negative impact on the figures. For the current-day Lanxess, these negative impacts were not that strong as prices remained quite stable in Q2. The reported figures were a notch above our expectations and in line with consensus.
... but the non-operational activities could have been better under control. However, Lanxess showed quite a good resilience in a shaky business environment. It looks as if the company has implemented a stronger ‘volume-resilience’ as profitability did not suffer too much from lower volumes, which stemmed from the strong adjustment of the business model, additionally helped by the other measures implemented. Our expectations have been met and consensus was beaten on the profitability level.
All divisions have increased their profitability, except for Performance Chemicals, by implementing higher sales prices and seeing good demand for their products in a demanding business environment. Q4 came in stronger than expected due to the successful passing on of higher raw material prices and lower one-offs. Consensus was met.
Lanxess has announced the closing of the divestment of its 50% stake in Arlanxeo. In return for handing over the 50% share to JV partner Saudi Aramco, Lanxess receives around €1.4bn.
Lanxess reported quite a good set of Q3 figures with profitability (hard figures) slightly above our expectations and barely failing consensus. The reporting period’s figures were characterised by mid single-digit organic growth with a small contribution from higher volumes. Price increases could partly protect margins, but EBITDA was helped by lower non-operating effects. Despite seeing some challenges emerging, management looks to have narrowed the guidance to the upper end of given guidance (EBITDA pre one-offs 2018E: 5-10%).
The NEW Lanxess reported quite good Q2 figures and a strong profitability increase (partly due to lower costs for the ‘Let LANXESS again’ programme) and some synergies. The top-line was above our expectations and profitability broadly fitted into our picture. The seasonal higher NWC outflow looks like the outlook for the remainder of the year. Consensus was broadly met.
Despite the good, but mixed, picture painted by the Q1 figures, the increase in guidance is an indication and not to be highlighted. But it confirms our view on the company as the Q1 figures did fit into our broad picture. Consensus for the New Lanxess was slightly beaten.
Lanxess’ FY figures look at first irritating and then at a second look disastrous. Top-line, we clearly missed the unexpected strong year-end sales party and on the earnings level the sun still shone at the pre one-offs level, but descending to the real world (one-offs were €-218m (€-50m)) the scenery looks wintery. Q4 was not a really successful quarter. Consensus was not met on the net earnings level.
Having teamed up with US financial investor Apollo, Lanxess is expected to submit a bid for the Akzo division.
Q3 sales were pushed by the Chemtura acquisition and clearly rose +25% (p: +6%; v: +3%; FX: -3%; portfolio) to €2,404m. The gross profit margin softened from 32.2% to 22.9%, but EBITDA strongly improved by +31% to €315m. Net profit attributable to shareholders came to €55m after €62m.
Operating CF rose +21% to €369m driven by higher D/A (€184m after €119m) and higher NWC inflow (€133m after €113m). Despite higher capex (€-125m after €-106m; 67.9% of D/A after 89.1%), investing CF moved from €-170m to €-119m, lacking the previous year’s negative net balance of €-68m generated by acquisition-related costs (€-198m) partly counterbalanced by financial inflows (€130m). Financing CF (€-484m after €-264m) reflected the higher net gross debt repayment (€-468m after €-249m).
Lanxess acquired Solvay’s phosphorous additives business in the US in order to improve its phosphorus-derivatives portfolio in flame retardants.
Management refined its FY guidance now expecting EBITDA pre one-offs to come in at €1,250-1,300m (previously: €1,225-1,300m; 2016: €995m).
Lanxess held an Investors Day in early September, at which management updated the road map presented in 2014 and provided more detailed information on Lanxess’s next steps. Furthermore, the future financial targets (EBITDA pre-offs margin: 14-18%; cash conversion: >60%; EBITDA margin volatility: 2-3pp) were outlined and discussed.
Q2 sales saw strong growth of +30% (v: +11%; p: +1%; FX: +1%; portfolio: +16%) to €4,923m, whereas the gross profit margin declined from 24.6% to 22.4% due to higher raw material and energy costs. EBITDA posted a significant drop by -22% to €227m absorbing the one-offs. Net profit attributable to shareholders deteriorated from €75m to €3m.
Operating CF declined by -13% to €156m burdened by the weaker operating performance, which could not be offset by lower NWC outflows (€-20m after €-79m) despite higher inventories and receivables. Investing CF swung from €-981m to €289m with the proceeds from the divestment of financial assets (€2.1bn) above the purchase price of Chemtura (€-1.8bn). Inversely, the financing CF (€-69m after €1,115) lacked the €1.2bn contribution for the creation of ARLANXEO.
Management confirmed FY guidance and continues to expect EBITDA pre one-offs of €1,225-1,300m (2016: €995m).
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
US & German manufacturing PMI hits lowest readings since 2009, UK manufacturing PMI heads below 50, BorgWarner expects material financial impact from customer production halts
Companies: AVON CGS HAYD HEAD HILS JHD RNO SCPA TWD TRI ZTF SOM GHH
There has been much comment on the fact that equity markets in the US and Europe have been shrinking for some years now, certainly in terms of the number of quoted companies, if not in total market capitalisation (MCap). This paper has been written with the assistance of the Quoted Companies Alliance (QCA) and focuses on the evidence for such in the London market and, in particular, that for smaller and midcap companies. It assesses that evidence and considers explanations. Finally, we ask why it matters, and assuming that it does, what practical steps can be taken to reverse the trend. Successful public markets have been a key part of the United Kingdom’s economic success for generations, even centuries, and we should not allow them to wither on the vine.
Companies: AVO AGY ARBB ARIX ASAI DNL GDR HAYD NSF PCA PIN PXC PHP RE/ RECI RMDL STX SCE TRX TON SHED VTA
Carclo’s H120 results show that the remaining businesses following the exit from Wipac in December provide a basis for a sustainable group going forward. The continuing businesses generated £56.1m revenues and £3.3m underlying EBIT. However, there remain significant challenges in reaching agreement on long-term funding with the lending bank and pension trustee. Our estimates will remain under review until these are resolved.
COVID-19 update – continuing to operate, div. suspended
Companies: Scapa Group
Bayer’s management will take a lot of money off its hands trying to settle three litigations in the US, of which the RoundUp one will be the most expensive. With this move, Bayer lifts some heavy weights from its shoulder, but not the full amount. The settlement of the dicamba drift litigation and PCB water litigation takes away some additional (financial) insecurity from the table, which is appreciated, as investors can now re-focus on the pay-off from the Monsanto acquisition.
A sticky situation…
Eden Research is the UK's only quoted biopesticide company which we see at an interesting inflexion point as its development work continues to transition to product launches across multiple geographies, crops and pests. Eden's biopesticide products offer advantages over conventional pesticides and the biopesticide market as a whole is expected to grow at a high-teen rate over the coming years. To support its on-going product development work and invest in its pipeline, the company has announced it has conditionally raised £10.1m (gross) via a placing of new shares. We maintain our Buy recommendation.
Companies: Eden Research
Companies: AVO AGY ARBB ARIX BUR CMH CLIG DNL GDR HAYD PCA PIN PHP RE/ RECI RMDL STX SHED VTA
COVID-19 Trading Update
Companies: Haydale Graphene Industries
Interim results were in line with the period end trading update, posting a record half-year sales. Both UK and US sites are operating normally. Crucially, H2 has started well, with no significant reduction in demand resulting from COVID-19. Ongoing close dialogue with customers remains encouraging, with management alert to the potential for order book disruption. The company remains cautiously optimistic and, as such, forecasts remain unchanged. Having raised £2.5m in January and £0.4m of asset finance with Hitachi Capital, the group looks to have sufficient cash to complete its current expansion and relocation programme, which remains on track. Encouraging progress continues with Airbus and a supply agreement reached with a major Tier 1 supplier, while today it has announced its first low volume production order from Airbus for the A380.
Against a backdrop of generally negative company announcements, Hardide bucked the trend by releasing solid interim results for the 6 months ended March 2020, noting limited impact to date from COVID-19 and a positive trading outlook. Furthermore, the allimportant move to new facilities and corresponding capacity expansion is both on track and on budget. Several of Hardide’s end markets will clearly be feeling the impact of COVID-19. However, we feel the importance of Hardide’s technology to its customers by extending the useful life of components and its diversity of end markets across multiple sectors including oil & gas, aerospace, flow control, power generation and precision engineering is enabling it to weather the storm. We leave our forecasts unchanged and see potential for an upgrade should end markets maintain strength and H2 margins match those of H1.
JMAT’s preliminary FY results might give a first indication of future (car) volumes and some perspectives on the developments in the battery materials business. The ‘preparation’ of the company erased c.-25% of EBIT. The justification therefore looks to us rather disconnected to the presentation by the company as management also swung into the line of companies unable to provide a 2020 guidance.
FY profitability was below both our and consensus estimates: (reported £388m; AV: £477m, consensus: £516m).
Companies: Johnson Matthey