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.
Companies: Covestro AG
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.
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.
It had been clear to everybody that 2019 would not be a perfect year after the weakening signals at the end of 2018. We have been a bit too cautious for 2019 as Covestro was able to report higher earnings, especially in Polycarbonates and CAS. Consensus was broadly met. 2020 will be challenging and management announced the usual measures to dampen the cost side as EBITDA is expected to come in even lower and also due to Coronavirus-related uncertainties.
Covestro’s Q3 figures beat our cautious expectations and were broadly in line with consensus, although EBITDA came in €10m lower. As expected, the negative pricing trend continued as the economic environment has not dramatically changed in recent months and the previous year’s quarter was not that bad. Despite management’s narrowing of FY guidance, it still remains above our expectations. We still see issues beyond management’s hands, which could cause an economic burden and where cost cutting w
Covestro did not do too badly in Q2, from our point of view. We had expected the significant downturn in profitability, which came in marginally higher than expected. Guidance for Q3’s EBITDA and the unchanged FY guidance signal a challenging H2 19. Consensus was beaten by nearly +4%.
As expected, Covestro reported lower sales and far lower profits, but the mechanics behind this is really interesting: -18.3% lower sales prices had a -64.9% effect at the EBITDA level. This shows how sensitive Covestro’s business model is. But one has to keep in mind that the MDI/TDI segment did well the year before. The Q1 figures did not fully match our expectations, but came in above consensus.
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headroom to FY21 estimates
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Companies: Epwin Group PLC
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