INSIGHT: Concern over auto output helps drive LANXESS downgrade

12 October 2012 17:22  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Concerns are being raised about near-term profitability and growth for Europe’s chemical makers, particularly those aligned to the region’s troubled automobile and construction sector.

Germany-headquartered plastics, rubber and specialties producer LANXESS felt the heat on Friday with a downgrade from analysts at Credit Suisse. The reason – the company’s strong alignment with European autos.

The short-term outlook is worsening, Credit Suisse said. Its analysts are 4% below consensus for the LANXESS 2012 earnings per share (EPS) estimate and they’ve lowered their share price target by 18% to €60/share ($78/share). The company’s stock was trading about 2% lower on Friday at just over €60/share but was still up about 45% over the past year.

LANXESS is a focused company with a good management track record since its launch as a stand alone company in 2004. It has done a lot of things right: consolidating in Europe; expanding in Asia, and finds itself now being squeezed by the market. It reports on the third quarter on 6 November.

After the first six months of 2012, the company was still on something of a high. Sales were up 11% year on year and earnings before interest, tax, depreciation and amortisation (EBITDA) before exceptional gains or charges was up 11%. Second-quarter 2012 sales were up 8% and EBITDA up 7%.

LANXESS has spoken of the strong contribution in the first and the second quarter from its performance polymers businesses which are those that feed into the auto industry. In the second quarter, standard grades of performance butyl rubber were weakening as was demand for technical rubber products.

Second-quarter segment sales were up 11.4% and segment EBITDA up 12.2% but volumes were lower. The businesses were benefitting from positive portfolio and currency effects.

Credit Suisse has based its downgrade clearly on the short-term outlook for autos.

Credit rating agency Moody’s last month forecast that western Europe light vehicle sales could be down as much as 8.0% in 2012, compared with global sector growth of 4.4%. This is because the outlook for sales in southern Europe and Italy has changed dramatically from the beginning of the year. Light vehicle sales in Italy are now expected to be down around 20% in 2012, while sales in Spain might fall by 11%.

These are light vehicles but LANXESS tyre and rubber products sell into the broader truck market too. “We are concerned about the outlook for H2 [the second half] given recent negative statements from truck suppliers such as Cummins, Accuride and autos-focused EMS-Chemie," Credit Suisse said. "We see stock overhang in Europe for autos and believe that production would have to be down c15% in H2 for inventory levels to normalise.”

LANXESS is investing to help balance its asset base between Europe and North America and growing markets in Asia Pacific and Latin America. And that requires capital spending in all regions.

So it is hardly surprising that while LANXESS is seen to be following its customers (tyre makers Continental and Michelin are expected to increase their capital spending by 20% this year, Credit Suisse says) the bank’s analysts worry  about future earnings growth.

The short term weighs on these expectations.

“We are 15% below consensus for 2013E EPS,” the bank’s analysts say. “We understand LANXESS' focus on growth, and believe their capex [capital spending] programme is justified given customers' expansion plans. However, in the mid-term we see extra fixed costs and depreciation reducing earnings as plants ramp up".

Credit Suisse has cut its full-year 2012 EBITDA growth forecast to 4.7% while LANXESS reiterated as recently as the end of September guidance of 5% at the low end.

“LANXESS is well positioned for a more challenging environment,” it said in an investor presentation while putting emphasis on its “price before volume” strategy. European customers, however, were said to be cautious in the midst of a volatile raw material price environment. It forecast a second-half 2012 EBITDA on a similar level to that reported in the second half of 2012.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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