26 November 2008 10:38 [Source: ICIS news]
LONDON (ICIS news)--Chemicals companies should monitor and manage expectations as there has been a sharp reversal of investor attitude towards the industry over the past few months, an industry analyst said on Tuesday.
The chemicals industry has shown the worst sector margin over the three past months and this has been part of the basis for a major sectoral downgrade, said ING analyst Paul Satchell in a paper prepared for the 7th ICIS European Aromatics and Derivatives Conference in Cologne.
Satchell delivered the paper by phone from his home in Wales due to illness.
He added that sentiment is important in unpredictable sectors, and “the chemicals industry is certainly subject to this”.
The sector has benefited from positive sentiment since 2004 but has seen an abrupt reversal recently, said Satchell.
Newsflow on individual companies often impacts the whole sector irrespective of operational relevance, and although peer comparisons are difficult between chemicals majors, market players still read across from one stock to another.
The main drivers behind strong valuations are free cashflow and earnings quality, or margin stability, said Satchell.
“Petrochemicals companies face challenges on [the] latter point,” he added. “Market perception of senior management [is] also a vital factor.”
Satchell said that the downside risk from cyclical exposure is now damaging valuations and that investors are concerned over the demand outlook.
“The liquidity crunch has not yet surfaced as a threat among quoted majors,” he added.
He said share buy-backs had been postponed and debt refinancing requirements were fairly light.
“[The] liquidity crisis [is] not yet impacting majors, but counterparty risk could become important,” said Satchell.
“The only certainty today is that uncertainty will continue,” he added.
The two-day conference ends on 27 November.
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