Stock Brief - Synthomer (LON:SYNT)

1st Oct '21 by Jack Brumby

17 comments 4037 reads

Synthomer is a specialist chemical company that supplies aqueous polymers. These polymers are used in industries such as coatings, construction, textiles, paper and synthetic latex gloves. The company occupies a leading position in most of its markets, is geographically diversified, and is increasingly focused on higher-margin product differentiation.

Its c14% EBITDA CAGR since 2014 has been driven by both organic investment and acquisitions (four have been made since 2016, with the most recent, Omnova, being particularly notable in terms of scale). So it seems that this group is growing steadily from a strong position.

So why, then, do its shares trade on just 8.8x forecast earnings?

A part of the answer may come down to the sustainability of its current level of profits. The group delivered an exceptional half-year performance recently due unprecedented demand for nitrile products arising from the need for PPE from healthcare providers. So recent results are distorted by an exceptional Covid performance.

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But this is not just a Covid play. The group has grown annual EBITDA from £100m in 2015 to the current run-rate of c£500m, and is positive on its future prospects. So perhaps we should be taking more notice of this stock at the current valuation, even if it is at near all-time highs?

Profile

What are the company's principal business activities, how does it generate its revenues?

Performance Elastomers - 41.8% of group revenue (£690.3m)

Performance Elastomers is focused on healthcare, carpet and paper markets through and supplies water-based Nitrile Butadiene Rubber latex (NBR) and Styrene Butadiene Rubber latex (SBR) products. The acquisition of OMNOVA has expanded the division’s scope to include the Performance Materials and Elastomeric Modifiers product lines.

Market position: No. 2 producer globally in NBR latex. No. 1 producer in European SBR latex. No. 1 producer globally of High Solids SBR.

Functional Solutions - 38.8% of group revenue (£646.7m)

Functional Solutions is focused on coatings, construction, adhesives and technical textiles markets and supplies acrylic and vinylic water-based dispersions. Following the acquisition, the OMNOVA CAST (Coatings, Adhesives and Surface Treatment) and Oil & Gas businesses have been integrated into this division.

Market position: Top five global water-based polymer producer, with leadership positions in dispersions in Europe, Middle East and Asia

Industrial Specialities - 16.2% of group revenue (£264.9m)

Industrial Specialities is focused on speciality chemical additives…

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Caper4

1st Oct '21

Thanks for the usual superb and comprehensive report Jack. Shares are actually down about 12% in last few weeks but I suppose that’s a reflection of the market generally rather than company specific .

BnB

I used to hold Synthomer and I rate it highly as a business. However, my bank’s analysts are insistent that the Materials sector, to which Synthomer belongs, rightly or wrongly, is due to continue its sell-off as we pass peak growth into the mid-cycle stage. Maybe a good company but one that could be tarred by the brushes of its fellow travellers?

MiserableJacktPotato

No mention made of the not too shabby dividend here - around 3.5% being paid out (17.3p on a 485p share price) this year.

Threepeat

Thanks Jack for this excellent and succinct summary of £synt, most this is already known but it's good to draw all the elements together in one article. The reduction in SP I think is a reaction to increasing oil prices as well as the current market concentration on interest rate and inflation risk.

This stock was highlighted on the last but one stock slam also at about 500p. I for one was convinced by its growth prospects allied to cheap SP and enticing yield. All the company needs to do now is meet it's own profit expectations and continue to reduce debt.

Disclosure - I bought twice after the stock slam and topped up this am before you published

Thanks again

mikebianchi

2nd Oct '21

Nice review, I hold a modest sum, I'm going to take Paul's advise sit and watch and if the next couple of RNS's are positive build a long term position.

Keep up the good work Jack, lets hope October provides some relief from a rotten September

JohnEustace

I recently bought. Lots of firms are being dragged down with the rest so perhaps not best timing. But while it pays a steady dividend I'm happy enough to buy while it's cheap even if it may be getting a bit cheaper near term.

I’d be wary that certain stocks look expensive just before conditions turn in their favour, and cheap just before the cycle turns against them. Still a good company though. I bought in the summer of 2019 in the high 200s when members of the board were making big personal purchases. They loaded up again in March 2020. Watch for disposals!

Rusty2

7th Oct '21

I was wondering what effect oil and gas prices would have on their margins?

Also will demand reduce because of high energy prices?

Shares are now down 20% from 52 week high.

8th Oct '21

Well it's been on the news today, steel and chemical companies may have to close down due the high gas prices. I have sold my Synthomer (LON:SYNT) shares today, will revisit if and when gas prices are more normal.

jonno

6th Dec '21

I see the scribblers at Morgan Stanley have downgraded Synthomer (LON:SYNT) to 'underweight', whatever that means, hence today's price fall as far as I can tell. Such events always remind of Peter Lynch's put down quip, that if one thinks like an institution one will invest like an institution.

Admittedly the company faces challenges with the current high energy prices and will have to integrate the acquisition of Adhesive Technologies that is has agreed to purchase from the Eastman Chemical Co, assuming it goes ahead, which looks as if it will. On the other hand it seems reasonable to expect the demand for Covid related products to remain buoyant given resurgence of the virus.

I have a modest holding and will continue to sit on my hands.

Neil D56

Tricky one Jonno- I bought recently when it bounced from £4.50, and am inclined to pick up some more around £4 but must admit this is a hard hit merely on a broker downgrade! Maybe factoring in the spike in oil and gas has really 'upset the applecart'!

Tricky as you say Neil, but share prices have been volatile of late, so it is difficult to know whether there is something more sinister than just market volatility at play. My inclination is to do nothing, which is just as well as I have no funds available in my ISA. The next scheduled update for Synthomer (LON:SYNT) appears to be early January.

Funderstruck

£SYNT The Morgan Stanley downgrade may relate to the £200m Placing price that would have to be set to get it away, further dilution and price reduction.

Would be appreciated if Jack and / or Roland would comment on this development.

Evening Funderstruck

The placing shares, approximately 10% of the existing equity were placed at 485p versus the intraday price in the market at the time of 493p according the the results of the placing published on 28 October. Perhaps the reason for the share price decline, if there is one, will become apparent tomorrow or perhaps not?

Like you, the views of Jack or Roland would be good to know.

All the best

Dragon

Apparently Morgan Stanley lowered their price target to 400p

Not sure that I put much faith in share price targets emanating from Morgan Stanley or their contemporaries. For what it is worth Synthomer (LON:SYNT) reiterated that trading was in line with management expectations, when they announced the acquisition of Adhesive Technologies on 28 October.

"5. Current Trading Update

Since Synthomer's reported Interim Results on 5th August 2021, underlying demand has remained strong in line with management expectations

· The Movement Control Order in Malaysia was implemented to restrict the impact of COVID-19, leading to reduced customer utilisation and demand.

· Action to offset raw material inflation coupled with the continued benefits from OMNOVA, investment in new capacity and ongoing efficiency measures has underpinned performance.

· Consequently, Synthomer's outlook for the full year remains unchanged with FY 2021 EBITDA expected to be in excess of £500m.

Looking ahead, the Group continues to expect Performance Elastomers to normalise in Q1 2022 as the impact of the COVID-19 pandemic reduces and incremental market capacity comes online.

The Board is confident that the business model provides differentiation and increasing specialisation and the Group's strong balance sheet is expected to support continued inorganic and organic growth in due course."

Thanks Jonno;

If Synt had little experience of acquisitions and merging them in to the firm it would be a reason to doubt their ability & thus mark them down but the Team have lots of experience over many years possibly it is the new CEO who is questioned , i will do a bit if digging.

Stock Brief - Synthomer (LON:SYNT)

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Jack Brumby

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