Belgium’s Solvay shares fall after poor Q3 results

LONDON (ICIS)–Investors shunned Belgium-based chemical major Solvay’s stock on Wednesday morning after it reported a sharp fall in underlying net profit, while chemical analysts had differing views on what’s to come for the firm’s shares.

Solvay’s shares were trading 5.18% lower as of 13:34 GMT on Wednesday at €124.30 by 9:30.

Solvay reported lower third-quarter margins earlier in the day lower, despite higher sales volumes, bringing net profit on an underlying basis down 7.4% year on year to €229m, although sales were up by 4% to €2.46bn.

Meanwhile, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose 1.3% to €553m, but the EBITDA margin slipped to 22%, from 23% in the third quarter of 2016.

For the January-September period, however, the company’s net profit rose by 19.8% to €794m, while net sales were up by 7.1% at €7.6bn.

Analysts at Bernstein Research said that, although Solvay’s pricing power stood flat during the quarter, higher variable costs led to an overall negative pricing effect of €22m on the recurring EBITDA.

“Volume/mix was strongly positive across divisions at +9% YoY [year on year] on group sales, continuing strong volume growth seen in Q2 2017. FX [foreign exchange] headwind was 4% and there was a -1% portfolio impact related to the sale of smaller polyolefin cross-linkable compounds and formulated resins in June,” said the analysts at Bernstein.

They were referring to Solvay’s divestment of its polyolefins compounds operations to Italy’s Finproject SpA, for an undisclosed amount.

“[Solvay’s] Sputtering growth engines: Earnings from Advanced Materials, and Performance Chemicals were below consensus estimates, while this was offset by the better-than-expected performance from Corporate & Energy and Advanced Formulations on the back of stronger demand from Shale oil & gas exploration,” added Bernstein.

Bernstein noted that consensus among the financial analysts covering Solvay puts the 2017 free clash flow estimate at €912m, but the company itself expects the figure to stand at €800m.

Bernstein’s forecast for the stock in a 12-month time frame stands at €110, with a ‘Market-Perform’ recommendation, or ‘Neutral’ on other banks’ terminology.

More upbeat, Germany’s investment bank Baader Bank issued a 12-month share price target forecast of €137 and a ‘Buy’ recommendation as it considered the “underperformance” in the third quarter widely expected by investors, arguing some of Solvay’s divisions are yet to see a recovery in coming months.

“Whereas the specialty chemicals unit Advanced Formulation gained recovery momentum, the second specialty chemicals unit Advanced Materials which was recently an earnings driver lost momentum as the composite business has not yet started its recovery, the yoy [year on year] base effect is very high and ramp-up costs weighted on margins,” said Baader Bank.

“At Performance Chemicals, the new Turkish soda ash capacities together with higher energy costs had a stronger than anticipated impact which might be monitored closely by the market at this commodity division is Solvay’s strongest cash flow contributor.”

The bank was referring to the 2.5m tonne/year soda ash plant recently inaugurated by Kazan Soda Elektrik near Ankara, which the producer has said will work at full capacity in December.

(Adds updates throughout)