Abstract
Synthomer is a UK based company that makes speciality chemicals and is a member of FTSE 250. The company makes synthetic latex used for gloves and medical use and dispersions used in construction industry. Synthomer was previously known as Yule Catto and changed its name after the restructuring aiming to focus on the polymer business. A year ago Synthomer made a transformational deal acquiring Polymerlatex, a leading producer of synthetic latex based in Germany. Synthomer trades at a P/E 9.5, below the sector average 14 and has a dividend yield of 3%.
Investment Thesis
The main driver of Synthomer’s healthy margin (2012 EBIT: 9.9%) is its cheap raw materials, mainly Butadiene and Styrene. Butadiene is a by-product of steam cracker for production of ethylene and other olefins. For that reason, it has little impact on the overall ethylene economics. As Butadiene and Styrene are by-prodcuts, sellers have limited bargain power. This is confirmed on the following Butadiene price chart, sourced by the Chemicals Pricing consulting ICIS. Cheaper raw materials have a positive effect on Synthomer’s margins.
Synthomer aims to generate 50% of its revenue in Asia by 2014. Most of its . NBR (nitrile butadiene rubber) capacity is in Malaysia. NBR is the main raw material used in synthetic glove production. Synthomer plants are located at close proximity the world’s leading glove makers (Hartalega, Top Glove). The chart below shows that glove consumption in emerging markets is dramatically less than Western markets (source: Hartalega Investment Presentation 2012). As standards of living increases, a rise in consumption is expected. China’s national healthcare programme aims to provide everyone in the country with affordable medial care by 2020 and is now in full swing.
Synthetic rubber replaces natural rubber in medical use as many people are allergic to natural rubber (US regulation: 502(c) of the Food, Drug and Cosmetic Act )
Synthomer is on track to deliver £25mn in annual synergies from the PolymerLatex acquisition, as it has already delivered £19mn. On a 10 year horizon these synergies account to up to 35% of companies current market capitalisation.
