Investment bank downgrades Yule Catto’s rating to neutral

03 July 2012 11:45  [Source: ICIS news]

LONDON (ICIS)--Yule Catto’s rating was on Tuesday downgraded to “neutral” from “overweight” by investment bank JP Morgan Cazenove after the UK-based specialty chemicals firm announced challenging trading conditions.

At the end of June, Yule Catto released a trading update that said demand in its Europe and North America business segment remained subdued because of continued economic uncertainty and its effect on general business confidence.

The group also said weak end-market demand for nitrile has been exacerbated by the impact of capacity additions from competitors, which in turn has led to price cuts that will “substantially lower operating profit” in its Asia business segment.

“The challenging trading conditions outlined at the time of the group’s May interim management statement have continued through the remainder of the first half of the year,” said Yule Catto in the statement.

“Demand is currently a little weaker than the first few months of the year, with business in the construction-related sector continuing to be the weakest area of activity,” the company added.

JP Morgan Cazenove said: “Continued demand weakness in Europe and North America has now been compounded by a structurally more worrying downturn in Asia in nitrile rubber.”

The investment bank said that downgrading Yule Catto to “neutral” was based on the expectation that current nitrile weakness will continue in 2012 and into 2013. The group’s target share price was cut to £1.80 (€2.25) from £2.80 following much tougher trading conditions, as competitor capacity additions in nitrile rubber affected the outlook.

Yule Catto’s 2012 earnings per share (EPS) target was cut by 21%, while its 2013 EPS target was reduced by 37% to reflect volume and margin pressure in Asia in particular.

“Having successfully restored the balance sheet and earnings base of the company – through its cost-cutting programme – and then expanded by the acquisition of PolymerLatex in March 2011, the issue going forward will likely be whether this pressure in nitrile rubber is structural with potential oversupply emerging,” said JP Morgan Cazenove.

“For now we assume that new competitor capacity additions continue to lead to downward pricing pressure, and thus an overall earnings decline in 2013,” it added.

Following the trading statement in June, investment bank UBS lowered its target share price for Yule Catto to £1.77 from £2.60, following the company’s bleak trading outlook.

At 10:13 GMT, Yule Catto’s share price was trading on the London Stock Exchange at £1.40, down 0.98% from the previous close.

Additional reporting by Leigh Stringer

(€1 = £0.80)


By: Franco Capaldo
+44 (0)20 8652 3214



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