INSIGHT: Solvay challenged to create value in 2008

18 February 2008 17:53  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Solvay has sustained topline and profits growth over the past four years and says that 2008 has started little differently from last year.

The Belgium-based producer is challenged now, however, as it has been in recent years, to convince the financial markets that its blend of industrial and pharmaceutical assets can deliver value.

Solvay is not exposed in vinyls to the US construction market and has seen the polyvinyl chloride (PVC) business develop elsewhere. It says that the business in Asia, South America and Europe is doing very well.

The plastics, base chemicals and pharmaceuticals manufacturer won’t say too much about the outlook for the year until its annual shareholders' meeting in May but states that the operating environment in its main markets remain favourable.

The company has pushed for growth in developing regions while it has worked to build greater resilience in the sometimes difficult European market.

Across its non-pharma portfolio also - businesses which include basic products such as hydrogen peroxide and soda ash alongside speciality polymers and vinyls - it has pushed to retain the top slot worldwide.

It is global number one in soda ash and hydrogen peroxide and global number three in vinyls.

That positioning has paid off. And the company can be expected to deliver this year even though it is threatened by the expected global economic slowdown.

The company is aiming to capture what could well prove to be significant growth via big projects in Russia with energy giant Gazprom. And it says it is looking for continuing growth in Latin America.

Extra vinyls capacity in the region will be use bioethanol as feedstock and is due on stream in 2010.

Past performance can be no guarantee of future profits but the Solvay businesses are well placed to weather whatever storms the global credit crisis eventually throws up.

Solvay is a company that looks to the long term and to the development of its businesses in new and sometimes challenging geographical markets as well as the organisational and technical developments that will ultimately underpin their performance.

Its full-year results were strong as might be expected given the ongoing relatively favourable operating environment for bulk chemicals in 2007. Even in soda ash, while the market has been softer in the US that softness has been offset by stronger export growth.

Chemicals sales growth was flat in the fourth quarter but favourable supply/demand balances helped Solvay lift recurring operating profits – what it calls REBIT or recurring earnings before interest and tax, by 14%.

The company’s peroxide businesses did well in the quarter, as did caustic soda. However, the fluor chemical commodities remained under heavy pressure. It is restructuring the business.

Plastics sales were up 3% in the fourth quarter but profits fell 2%. Specialty polymers through 2007 were hit by the unfavourable US dollar and Japanese yen exchange rates and the seasonal slowdown in vinyls in the fourth quarter was more marked in 2007 compared with 2006, Solvay says.

Solvay’s pharma profits were much higher - up 42% - in the last quarter of 2007, but the comparison was made with a period in 2006 when there was extensive customer destocking.

Pharma sales growth was flat year on year as were profits and the operating margin at 17.6%.

Solvay has plans to push the pharma margin higher but suffered last year when US authorities said one its key schizophrenia drugs, Bifeprunox, could not be approved.

Its shares have underperformed over the past year on the pharma news and the fact that the company is seen largely as a conglomerate.

The shares trade at a multiple below the chemicals sector average. Persuading the markets that it deserves a re-rating will be a difficult in 2008 given the clouded global economic outlook.

By: Nigel Davis
+44 20 8652 3214

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