Pandemic encourages Europe chems 'never-ending' move to specialties - bank

Author: Tom Brown

2020/07/09

LONDON (ICIS)--European chemicals “never-ending move” away from commoditised chemicals towards specialties remains the primary driver for the industry, with the coronavirus pandemic increasing the focus on the resilience of business models, analysts at Credit Suisse said on Thursday.

The majority of European chemicals firms have pushed further downstream to defend against large-scale basic chemicals capacities coming onstream in lower-priced feedstock regions.

At the same time, the weak demand brought on by the economic collapse this year has increased focus on defensive stocks.

Investors have also moved to focus on safe havens during the unrest of 2020 so far, as evidenced by the rock-bottom of even negative interest rates seen for debt issued by some mature economies, and this has continued to drive up the pricing of specialised chemicals stocks against cyclical peers.

The premium on multiples of earnings before interest, taxes, depreciation and amortisation (EBITDA) for specialties players has risen to an average of 140% compared to commodity players during the crisis compared to historic rates of around 90%, Credit Suisse said.

The ongoing ramp-up of commodity chemicals capacity in China, which is likely to see the country move to becoming an exporter rather than a buyer of several key chemicals such as polypropylene (PP), according to ICIS analysis, is likely to drive this trend towards decommoditisation in Europe.

Executives driving a shift up the value chain are often looking for less exposure to the peaks and troughs that characterise commodity chemicals.

Germany’s Covestro stands as one of the few remaining cyclic chemicals plays among listed European firms, although the firm is currently betting big on sustainability and focusing research among developing new applications for that market.

UK firm INEOS, while described by Moody’s as one of the most exposed to current low demand in less specialised chemicals markets, has invested in developing market-leading positions in numerous commodity chemicals chains and, as a private firm, is less exposed to investor concerns than many of its peers.

Other players have increasingly characterised themselves as specialties-only players, with Evonik selling off its methacrylates (MMA) arm in early 2019 and Arkema rebranding itself as a pure-play specialities player with targets of deriving 100% of its sales from non-commoditised chemicals by 2024, partially in response to activist investor pressure to sell off its own methacrylates division.

Pressure to simplify operations to make a company’s value offering more comprehensible to investors has also been a factor to combat the so-called “conglomerate discount”, with private equity players keen to acquire less profitable basic chemicals operations from big European incumbents.

Several players that have moved to specialise have yet to fully convince markets, with valuations remaining cheaper than underlying portfolios would suggest, a common complaint among European chemicals CEOs.

Arkema has the largest upside potential due to its mooted methacrylates and commodity fluorogases divestments, and LANXESS, where the current valuation does not reflect the drastic steps taken by CEO Matthias Zachert in reshaping the company’s operations away from the rubber and automotive sectors.

Solvay also has a record high enterprise value to earnings discount versus portfolio quality, Credit Suisse added.

UK-based Croda has the largest discount potential in spite of its strong portfolio due to its current valuation, while DSM and Clariant are largely fairly valued at present.

Brenntag is also defensively-positioned, according to analysts at Baader Bank, with the Germany-based distributor standing to be significantly less affected by the pandemic disruption than its peers.

Focus article by Tom Brown