23 January 2007 17:50 [Source: ICIS news]
By Nigel Davis
Key chemicals sector themes this year will be restructuring and utilisation of balance sheets, they suggest. The bank’s top buys are Akzo Nobel, Croda, ICI and Lanxess and it likes Air Liquide and Johnson Matthey. It is more cautious on Arkema, BASF, Ciba and Clariant.
The analysis highlights the fact that portfolio realignment continues as a key theme in the sector as firms seek stronger and more stable growth. DSM was in the vanguard most recently of this now largely industry-wide push.
It is not simply a move from commodities to specialties, the shift that ICI attempted in the 1980s and 1990s, but a search for value. Stronger cash flows through the upturn have helped fill out producers’ balance sheets. A critical question for many companies is how they intend to use their new found wealth.
The sector can be split between those with more work to do – or more opportunities to grasp – and those digesting changes made earlier.
Companies like Ciba and Clariant are busy implementing new cost control measures and battling hard against competitive pressure from
Arkema has impressed analysts with its restructuring plans. The worry is over how long it will take to make changes and realise the benefits.
Industry giant BASF had a strong 2006 and questions are being raised about the momentum it can maintain running through 2007 when pressure is expected on oil and commodity chemical prices. A significant proportion of BASF’s profits have been earned in its oil and gas business.
Merrill Lynch is not alone in liking Air Liquide and Johnson Matthey, both of which are growth stories but with greatest prospects over the longer term.
Analysts polled by news agency Reuters on Tuesday suggested fourth quarter sales growth from Air Liquide would be a relatively modest 2.6% but underlying growth would be stronger. Merrill Lynch estimates are for Q4 2006 sales of €2.87bn compared with reported Q4 2005 sales of €2.83bn.
Looking across the sector Akzo Nobel and ICI are attractive because of their impending and recent portfolio re-shaping and subsequent balance sheet strength.
Akzo Nobel plans in 2007 to separate is Organon Biosciences business through an IPO (initial public offering). Private equity groups are reportedly interest either in parts of or all the business.
What Akzo Nobel does after the Organon spin-off remains to be seen but has piqued interest with a possible bid for ICI put in the frame. Having sold the Quest flavours and fragrances unit to Givaudan, ICI is almost debt free and in a much stronger financial position. Analysts believe that there is still more scope for cost cutting.
The earlier sale by ICI of its oils and fats business Uniqema to Croda puts the latter company on its mettle. Merrill Lynch is bullish on the stock feeling that there is significant upside for earnings per share and the share price if management can turn the old Croda into a proper specialty producer.
Its enthusiasm for Lanxess is based on the company’s aggressive management, continued cost cutting and change in culture. Lanxess’s balance sheet is much stronger given divestments in 2006. It has also made a first, small acquisition.
Chemicals merger and acquisition activity showed no signs of slowing in 2006 and for some firms in 2007 there is a great deal to digest. That does not mean, of course, that there are not more groundbreaking deals to be done.
How chemical companies use their new found wealth to deliver value, whether through acquisitions or by more aggressively returning cash to shareholders, will generate excitement in 2007.
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