SIF Folio: Synthomer Could Be Too Cheap

10th Aug '21 by Roland Head

17 comments 5122 reads

FTSE 250 chemicals group Synthomer (LON:SYNT) describes itself as “one of the world’s foremost suppliers of aqueous polymers”. The firm’s polymers are used in the production of products including adhesives, carpet, paint and -- of course -- latex gloves used in healthcare.

Sales of such nitrile butadiene rubber (NBR) products have rocketed during the pandemic. Operating profit from Synthomer’s Performance Elastomers division rose by 800% to £209m during the first half of 2021, compared to the same period in 2020.

This surge in demand has somewhat distorted the company’s financial performance. But the City consensus view seems to be that much of this growth will be retained to form a new baseline for sales.

If this view is correct, Synthomer shares look potentially cheap to me, on 10 times rolling forecast earnings.

Synthomer published its interim results last week and the shares now qualify for my SIF stock-buying screen. This seems to support my view that this stock could offer the kind of affordable growth I’m looking for. This week I’m going to take a closer look at Synthomer to decide whether to add the shares to SIF and my personal holdings. (For a quick summary of how I run the rules-based SIF virtual portfolio, click here.)

Synthomer (LON:SYNT)

Before I look at the numbers, I think it’s worth understanding a little more about Synthomer. This business produces specialist polymers that are used by clients in a wide range of industries. You can see an overview of all the markets served by Synthomer here.

The business can trace its roots back to 1863 and was previously known as Yule Catto. This business had ties to rubber and oil plantations in Malaysia. This link remains today - plantation owner Kuala Lumpur Kepong Berhad has a 21% stake in Synthomer. The shares have tripled over the last 10 years, providing attractive returns for long-term holders:

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In 2020, Synthomer decided to scale up with a £654m deal to acquire rival Omnova Solutions. The transaction was funded with a £204m rights issue and new debt, leaving the group with leverage of 2.5x EBITDA. Strong cash generation - and the Covid-19 profit surge - means that this leverage ratio is now down to 0.8x EBITDA.

The company hasn’t broken out…

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Bronstein

10th Aug '21

I'm new here. What is the SIF Folio and where can I see that?

Reassured you are buying. I bought myself last week. There are so many uses for synthetic rubber that even though the COVID bonus is a one off, there is also an argument that other uses will benefit beyond covid recovery. That along with the fundamentals was good enough for me. Not easy to find such quality at such a reasonable price these days.

mortimer

snap roland i thought the same as you i bought this morning

Threepeat

Hi Roland,

Good article, echoes my thoughts

Synthomer (LON:SYNT) was brought to my attention in the last StockSlam and it took a week or so to look into it. Having put the numbers from the RNS about forecast EBITDA into my calculator it looked like a PE of around 6 which I agree is far too cheap compared to its competitors. Much is said about reducing demand but in the recent HY results the Co says it expects continued growth. Since these HY figures I recast my numbers on a slightly reduced growth curve only to find a PE rising slightly but still under 9. Stocko's figures for PBT still look too low.

Good acquisition plus organic growth plus growing dividend added to reducing debt and reducing pension deficit makes this stock a good medium term buy - or keep buying if you already hold.

Please keep on producing these excellent articles Roland

Steve

DAZZA64

Synthomer (SYNT) I also bought last week after great h1 results. Based on H1 producing £322m EBITDA & £254m nett profit, with the company forecasting £500m+ EBITDA for full year 2021, my estimate of nett profit for the full year 2021 is over £400m. Whilst demand for nitrile butadiene rubber for PPE has been boosted by Covid, stockpiling and stock replenishing of PPE is not going to disappear in 2022.

Roland Head

Hi Bronstein,

I run the SIF portfolio as a Folio in my personal Stockopedia account. I include a snapshot of all positions in my monthly review - you can see the last one here:

https://www.stockopedia.com/co...

Regards,

Roland

andrewquinn1

Thanks Roland - great insights. I see Hon Hai Precision Industry Co in you SIF, do you have a view on this business?

Harry Hindsight

Read what you like in charts. Good uptrend halted in 2019. Has picked up to where it was so 500p could be a new support to reach 600p. Sorry about the CCI I'm still working on how useful it is. The MACD though says we are in high territory - at the moment.

11th Aug '21

Hi Andrew,

I understand that Hon Hai Precision Industry Co (LON:HHPD) is the formal name for electronics group Foxconn - a major supplier to Apple, among others. However, the UK listing is a secondary listing - the company's primary listing in Taiwan.

I'm afraid it's not a business I'm familiar with, as I don't generally invest in overseas stocks in SIF.

My SIF buy screen doesn't explicitly exclude dual listings, as there are some I will consider, typically those with listings in two western markets (e.g. UK/EU or UK/US).

Melvyngd

12th Aug '21

Where did you get SYNT from as I cant see it in your SIF screen or your relaxed screen.

Best wishes

13th Aug '21

Hi Melvyngd,

Good question! Synthomer (LON:SYNT) has been dipping in an out of the screen recently, but when I used the Tools/checklist facility on the StockReport on Monday (9/8) to check if the stock was compliant it passed all tests. The only borderline variable was the PEG ratio which was exactly on my limit of 1.2.

However, the situation has since changed. The rolling PEG ratio shown by Stocko has risen to 1.6. As the share price has been steady this week, I'd guess this change relates to the impact of the H1 results being processed by Stocko's algorithms.

For me, this doesn't matter - a stock only has to qualify at the time my article is published. I'll then add it to SIF and hold for nine months unless it warns on profits.

Hope this all makes sense, happy to answer any other questions that crop up.

(Disclosure: I hold Synthomer)

Thanks for the information, I did buy anyway so I will wait and see.

Frank Andrew

17th Aug '21

Agree with analysis

Boon

24th Aug '21

Blimey there's a good following for Synthomer (LON:SYNT) here on Stocko... on the community rating, its got a 58% Buy, which is one of the highest I've ever seen for a share (normally its in the 10% to 25% Buy range).

Hard not to like. Great stockrank. Broker forecasts are at a 6-8x PE ratio.

Rusty2

26th Aug '21

Marshall Motor Holdings (LON:MMH) is 65% but it does not mean 65% of subscribers hold it.

GrahamF

I would just take care here about raw material costs.

Think monomers. The building blocks for the polymers they make. Oil price driven.

No position myself

But that will affect many companies, won't these just get passed on to the buyers? Unless there are cheaper alternatives.

Chemicals are very cyclical though, it could be approaching a peak soon.

That’s a fair point. The competition will be using the same monomers. However, margins are pretty thin in this business and so any failure to sell a full price increase can have a large impact. It’s also going to depend on what their contracts with the monomer suppliers are like. Just thinking that, if I was holding this share, I would be a bit nervous about that.

SIF Folio: Synthomer could be too cheap

Synthomer (LON:SYNT)

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Roland Head

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