Synthomer: Gearing Up For A Recovery?

Wed 2:38pm by Mark Simpson

7 comments 573 reads

Over the past few weeks, I have been looking at some stocks making 52-week lows. I've been following the funnel from the initial screen, doing some initial checks, which ruled out some companies, and am now at the stage of deciding which companies should make (or stay on) my watchlist.

One of the best ways to get to the meat of this is to start to look into the details of what a company does, and writing a Stock Pitch article is a great way of doing this. Our Stock Pitch articles all tend to follow the same format, and it is for a good reason: the consistent layout means that all of the major considerations when investing are likely to be covered. This week, I have picked Synthomer (LON:SYNT) for the simple reason that this is the stock from the screen ideas that I know the least about. The gains in potential insight for me are greatest in my area of least knowledge.

Summary

Synthomer (LON:SYNT) is a small-cap, Main Market-listed speciality chemicals producer which sells its products to other businesses. It has a history dating back to the 19th Century, and some investors may remember it by its former name, Yule Catto. It has three divisions: Coatings and Construction Solutions, Adhesive Solutions, Health & Protection and Performance Materials.
With a StockRank of just 45, this won't appeal to quant investors. The Momentum Rank is one of the lowest in the market, at just 1, reflecting a weak share price and broker downgrades over the last year.
I am always fascinated by this type of stock. Shareholders who held shares at the peak price four years ago have lost almost 99% of their money. The company paid a dividend per share in 2021 greater than the current share price. (Although there has since been a rights issue, so the total amount paid out in dividends would be less than the current market cap.)
On the surface, the company's quality metrics are uninspiring. However, in the period 2010-2019, it had an ROE that averaged above 20%. A combination of weak EBIT and acquisition accounting, increasing their book value due to goodwill and acquired intangible assets, makes the current figures appear much worse.
The large acquisitions the company made in the past couple of years have built scale, but…

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jesseowens

Thu 12:49pm

Great article. I think it's an important one to position size correctly . You could easily multibag with a small upswing in the enterprise value but more massive dilution or even administration are on the cards with a further downturn in trading

Tombholliday

Thu 2:59pm

Based on your assessment of Zotefoams probably need to buy a load of these

JASVFS

Thu 5:34pm

Thank you Mark, good luck to the company and shareholders. It rang a loud bell for me though, many years ago, pre Stockopedia when I was even more naïve, we'd built a holding in BTR the industrial conglomerate. Terry Smith wrote a damning sell note on it basically saying it was built on sand, the shares fell and we added. We lost £20,000 before it had shrunk and merged with Siebe to form Invensys. There was a mountain of goodwill from multiple acquisitions which almost disappeared when push came to shove. I've followed Terry Smith since.

Mark Simpson

Thu 7:01pm

I’ll certainly consider buying synthomer at some point, just probably not yet. As zotefoams has shown, you can be a capital intensive, indebted business with a history of destroying shareholder value, struggling to pass on risking input cost, but in the right hands, with inflation moderating and with a focus on controlling costs it can become a good investment. The obvious parallels between the two businesses are not lost on me

Of course the debt here is from acquisitions and in zotefoams case capital investment, but in both the seeds of a recovery is present, with zotefoams a bit further on in theirs. After all, most businesses are not consistently great or terrible , they go through wild swings in both trading and sentiment and my role as a value investors is to avoid (or short) the expensive businesses where the outlook is poor, and buy the cheap ones that are recovering.

Thu 7:06pm

Thanks. I totally agree, which is why I was keen to point out that this should not be a big part of anyone’s portfolio, even if they like the risk reward here. The good thing about this sort of scenario is that as an equity holder the most you can lose is 100%, the bad news is that would still be painful if one oversizes one’s position.

Harry Hindsight

Thu 7:58pm

Ok - position size 1%.

That aint going to get the Porche GT3 out of the garage, even if it was in there.

The Boon Fund

Thu 10:22pm

I've been tracking Synthomer (LON:SYNT) for a while. It clearly is in a very "special situations" basket, with ongoing covenant holidays all that is keeping the equity value not going to zero.

For years after COVID, the company blamed overstocking of nitrile gloves for their woes. However, that overstocking has now been gone for a while, and yet the company doesn't make a song and dance about recovering all those lost sales. Perhaps they are being outcompeted by cheaper Asian manufacturers?

They concede as much with their pivot away from "basic chemicals" (I think that's the term?) because of increased competition, depressed margins there.

So they have a strategy to focus and grow "speciality" chemicals. However, what's not to say they are also being outcompeted there by Asian competitors? I think one will have to do deep research in this area, to see if Synthomer has a moat and pricing power. Because this is the thing that management have banked on to rescue the company in the next few years.

Meanwhile, I don't know why KLK keep holding. KLK is a big owner of rubber plantations and producer of latex. Which, of course, was a big part of Synthomer's business - making rubber gloves and other things. Now its less of a focus for Synthomer - is there even a strategic rationale for KLK to own Synthomer?

Synthomer: gearing up for a recovery?

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Mark Simpson

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