In the wake of the EU referendum result, our view of the UK chemicals sector remains relatively upbeat. The companies we cover (Croda, Elementis, Scapa, Synthomer, Victrex, Zotefoams) generally have limited domestic exposure and plenty to gain on transactional and/or translational FX exposure. The main beneficiary of FX is Victrex, where as a rule of thumb, we would expect a 10% sterling devaluation to increase Group PBT by 10%, all else being equal. An isolated period of disruption/ contraction in the UK could therefore be comfortably managed by most. Given that some commentators are now also worried about a destabilising effect on the rest of the EU, which could trigger euro weakness, it may make sense to favour those companies with a more balanced international footprint. We therefore highlight Elementis positively, given its high percentage of US sales, but would apply more caution to Synthomer, which has the most European exposure (c.80% of profits last year). Balance sheets are robust and dividend yields high, particularly Elementis and Victrex, which have ongoing special dividend programmes.
Companies: VCT ELM SYNT CRDA
Our recent sector report (18th April) highlighted multiple headwinds facing the sector in H116: a subdued and recently downgraded global growth outlook; oil price volatility and a still-falling rig count; the potential for a hard landing in China; the Brexit vote and its implications for sterling. Nevertheless, we expect this to be a positive year for the UK sector, a view reinforced by recent commentary from all the stocks under our coverage. Our BUY ratings are Croda, Victrex and Zotefoams and we are positive on both Elementis and Scapa (both Corporate).
Companies: VCT ZTF ELM SCPA CRDA
Croda’s Q1 update reaffirms full year profit expectations as continued margin enhancement and mix offsets somewhat sluggish underlying sales trends. Reported sales increased by 7.7% (+9.8% in the three core sectors) and by 0.4% on an underlying basis. Profit growth in Q1 was achieved through a good performance in consumer markets and innovation driving margins (New and Protected Products +8.0%). Operating margins increased by 60 basis points. Despite pockets of good growth (Asia, Europe, NPP), underlying sales trends have been held back by North America, where export customers have been impacted by the stronger dollar, and Latin America, given challenges in that region. Despite this, we continue to expect a year of good progress and remain at BUY. NB shares remain cum-div the 100p special.
Companies: Croda International Plc
Byotrol is an Aim-listed anti-microbial play which floated in 2005 and underwent reorganisation, including appointing experienced new management, in Q4 2013. We had an initial presentation from the company on its trading statement on 25th February and look forward to learning more. Byotrol’s USP is in developing and commercialising hygiene products with IP protection and superior characteristics, especially in terms of long-lasting action. Byotrol addresses the B2B market in areas like surface sanitisers in food retail (eg used in 560 M&S stores), food production and hospital healthcare (in trial with NHS/ISS) - all areas with clear regulatory drivers and high profile problems like MRSA. Key initiatives which could transform the group include: seeking US EPA registration for surface care and a marketing/development agreement with Solvay. In the B2C market, Byotrol has a number of existing products.
Companies: BYOT AGM ELM SCPA SYNT VCT ZTF PIM SYN ITX VRS CRDA
Amino Technologies (AMO LN) Contract extension with Vodafone Netherlands | Spirent Communications (SPT LN) Appointment of CFO | Zotefoams (ZTF LN) MuCell momentum building
Companies: AMO AGM ELM SCPA SYNT VCT BYOT PIM SYN ITX VRS SPT ZTF CRDA
There are plenty of things to worry about at the start of 2016: a subdued and recently downgraded global growth outlook; oil price volatility and a still-falling rig count; the potential for a hard landing in China; the Brexit vote and its implications for sterling. Nevertheless, we think this should be a positive year for the UK chemicals sector. There is plenty of evidence that consumer-driven chemicals demand is picking up and, to a degree, offsetting weaker industrial demand. Meanwhile, a significant currency tailwind is developing for sterling reporters. This may be short-lived but it is not yet fully factored into forecasts. At an individual company level, 2016 should provide initial answers to some intriguing questions: Will Victrex see off the competitive threat from Solvay? How will Paul Waterman refine and reinvigorate Elementis’ strategy? How great are Calum MacLean’s ambitions for Synthomer? Our BUY recommendations are Croda, Victrex and Zotefoams and we are positive on both Elementis and Scapa (both Corporate).
Companies: AGM ELM SCPA SYNT VCT ZTF BYOT PIM SYN ITX VRS CRDA
Croda is a company of the highest quality and in our view fully merits its premium rating. 2015 was a return to form with good growth in sales and PBT (constant currency PBT +8.8%) after two somewhat disappointing years. This was driven by an excellent contribution from Omega 3 and New and Protected Products more generally. NPP sales now account for 26% of Group, underpinning ongoing margin development. The 100p special dividend was the icing on the cake and the shares are still cum-div.
Augean (AUG LN) Site purchase to support ANSS contract | Croda International (CRDA LN) Impressive FY results, 100p special dividend confirmed | Dotdigital Group (DOTD LN) Matching ambition with delivery | Genus (GNS LN) H1’s: strong PIC performance but ABS impacted by weak dairy trends | Oxford BioMedica (OXB LN) Proposed £8.1m placing provides cash resources into H2 2016 | Spectris (SXS LN) Bolt-on acquisition of CAS Clean Air Service
Companies: AUG DOTD GNS SXS OXB CRDA
Croda has confirmed a good year of progress in 2015, a fraction ahead of our expectations. All key metrics show growth (CC sales +4.2%, PBT +8.8%), an impressive results in a challenging and unpredictable market environment. The main news in the statement is confirmation of a 100p special dividend (3.6% yield in isolation), reflecting the strength of the balance sheet and cash generative nature of the Group. Growth continues to be driven by innovation (New and Patent Protected Product sales growing at 4x underlying sales) and investment (£200m invested in organic and inorganic growth opportunities). Croda is a company of the highest quality and in our view fully deserving of its sector leading rating.
A solid Q3 update confirms modest sales growth in Q3 (+2.3%), driven by another strong performance from the Consumer sectors and from Life Sciences in particular (+7.3%) on the back of the pharma grade Omega 3 API launch in the US. Q3 margins were ahead of the prior year with growth of New and Protected Products (NPP) well ahead of overall sales. Full year expectations are reiterated on a constant currency basis, implying a modest currency related downgrade to forecasts.
Croda's interims strike a confident tone confirming a continued improvement in underlying sales, strong margins and 7% PBT growth. This was underpinned by record sales of New and Protected products. Life Sciences is again the stand out performer, reporting 15% revenue growth on the back of the Omega 3 product launch. Encouragingly, Q2 sales were ahead of Q1. Full year expectations are reiterated, despite tougher comps from H2. We expect to retain our forecasts. Croda is a Group of the highest quality. Our Hold recommendation reflects a full valuation (c.14x EV/EBITDA), which is in takeover territory.
AMINO TECHNOLOGIES (AMO LN) Strong interims and transformative acquisition | AUGEAN (AUG LN) Strong H1 performance, in line with expectations | CARADOR INCOME FUND PLC (CIFU LN) NAV -0.4% in June, 2.5c dividend declared as expected | CELLO GROUP (CLL LN) On track | CRODA INTERNATIONAL PLC (CRDA LN) Confident interims confirm on track for a return to growth | MOBILE STREAMS (MOS LN) FY’15 profits and cash in-line | RENOLD (RNO LN) Q1 trading a little disappointing | SCAPA GROUP PLC (SCPA LN) Trading in line; Swiss facility to close | VICTREX (VCT LN) Solid performance despite Invibio underperformance, small acquisition
Companies: AMO AUG CLL MOS RNO SCPA VCT CRDA
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Treatt has performed well during FY20 despite the pandemic. There was strong momentum across the tea, health & wellness, and fruit & vegetables categories, and citrus markets recovered as expected. The strong growth across the non-citrus segments is resulting in a slightly reduced dependence on citrus (now 50% of sales). The UK relocation was slowed down as a result of the first lockdown, but the building work is now complete and the move will begin in mid-2021. While management report a strong start to the new financial year, the outlook is understandably uncertain: demand is not expected to return to normal levels before the end of FY21 or into FY22, though management is confident the business is in the best possible shape to face the uncertainty. The FY20 results demonstrate this, with a good cash performance and a 9% increase in dividends implying management’s confidence in the year ahead.
Companies: Treatt plc
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
Interswitch, a Nigeria-based payments firm, has hired advisers to resurrect plans for a stock-market listing in London and Lagos later this year, which may value the financial technology company at $1.3 billion to $1.5 billion.
Roxi Music UK music streaming service plans London IPO as it goes up against Spotify. They have appointed investment bank Arden Partners for an initial public offering (IPO) on the London Stock Exchange later this year.
Companies: MUL MTFB BLOE MTC STX BEG VRS SFE RMS SWG
3M sees early signs of electronics recovery, Paccar expects strong truck demand in Europe, MKS Instruments reports 22% q/q semis growth in Q4, Kone sees stable 2020
Companies: CGS HEAD HILS JHD OXIG RSW RNO SCPA TWD ZTF SOM GHH
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