INSIGHT: Rhodia investing for growth

19 November 2007 16:12  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Rhodia is big in Brazil and getting bigger in China, where sales are expanding at something like 20% a year.

The company is pushing hard into high growth markets - indeed it is on something of a growth track: a far cry from the position it found itself in just a few years ago.

Markets have helped but the Paris-based specialties maker has been turned around. Tough restructuring and a much simplified product portfolio have paid off.

Rhodia expects to hit at least one financial target in 2007 a year ahead of schedule in December - a cut in the net debt to recurring EBITDA (earnings before inerest, tax, depreciation and amortisation) ratio of two.

More importantly - and this is what investors like - it is back in the black and generating a healthy amount of cash. A renewed dividend payout from the company is awaited and could come as early as next year.

The market reacted positively to the third-quarter results earlier this month which, although they came in below analysts expectations, showed a real turnaround in cash generation - to €53m ($78m) for the period from a negative €10m in the third quarter of 2006.

The cash is coming from stronger sales - up 7%, healthy volumes and a good degree of pricing power, coupled with a much more streamlined and focused company all round.

There were times, not so long ago, when few believed that it could be done. But now analysts are hailing the Rhodia transformation.

The outlook for this year at least is for continued strong volume demand and solid pricing power. Rhodia says that strong EBITDA growth can be expected. It forecasts the generation of more than €100m in free cashflow for the year as a whole.

These are the sort of projections that investors also like. They should approve that the company is looking to growth in two of the most attractive markets for chemicals globally.

Rhodia is unlikely to grow much through acquisition but has found that it can make real progress in China by lifting domestic production capacities.

A new diphenols plant - Asia’s largest - was opened in Zhenjiang, Jiangsu province, last week. Rhodia also announced that it was building a new silica plant in Qingdao in Shandong.

The company wants to double its China sales over the next five years.

Following the past few years of heavy restructuring, the company is certainly more streamlined and focused.

“The remaining businesses are generally high-margin, niche businesses, with ether strong growth potential through technology or a steady cash inflow,” say analysts at Credit Suisse.

The bank thinks that the company is ready for a re-rating although they can’t quite see the catalyst for a change year. The market has not yet given Rhodia full credit for its change, they add.

The Rhodia transformation has been achieved through a combination of astute portfolio, cost and financial management. The company has a group of quality businesses - 15 others have been divested.

Debt has been restructured and pushed out to make it more manageable. Interest cover from EBIT (earns before interest and tax) this year is expected to be three times.

What is needed now, as far as the shares are concerned, is possibly a catalyst for change.

Rhodia is widely seen still as a “work in progress” so there are unlikely to be more, sudden bursts of confidence. But the company has some good added value businesses, and what looks like a less cyclical portfolio than many of its specialty peers.

It is in a relatively good place in polyamides, arguably its most cyclical business. It is exposed, nonetheless, to fluctuating energy and feedstock costs and in its acetow business, to the weak US dollar.

Some are concerned about the future for the energy services businesses segment where the trading of carbon credits from the installation of pollution abatement technology plays such a key role. How carbon trading schemes work after 2012 have yet to be decided, so the future remains uncertain.

Uncertainty and the threat of cyclicality that have to be managed carefully. Rhodia’s performance this year is likely to look good. It could do reasonably well in 2008. The testing time will come when markets begin to cycle down.

Rhodia is in a better place but has some way to go. To get where it wants to be it needs to keep investing for high growth and in that respect China and Brazil are key.

($1 = €0.68)

By: Nigel Davis
+44 20 8652 3214

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