Synthomer cautiously confident as capex reaps profits

Synthomer, the manufacturer of speciality polymers, reported a 6.4% increase in underlying profit for the first half of the year, with management "cautiously confident" for the full year.

The FTSE 250 group generated £1833.8m of revenue in the first six months of the year, an 8.2% increase on the same period a year ago, or 6.4% if currency swings are ignored. Growth was boosted by the acquisition of the Pischelsdorf site from BASF in January.

Volumes were flat in the developed segment of Europe and North America but increased 24% in Asia and the rest of the world.

Synthomer, which in 2016 set out on its biggest ever growth capex programme, said it remained on track to see the larger investments relating to the 90 kilotonne expansion of its Nitrile factory in Pasir Gudang, Malaysia come on line towards the end of the third quarter and the 36kt expansion in Worms, Germany 2018 in the first quarter of next year.

Operating profits rose 3.8% to £79.4m, with EBIT margin at 9.5% being 40 basis points lower than the same period last year, with profit before tax up 6.4% to £76.2m, or up 4.3% at constant currency rates.

At the first-quarter stage Synthomer had flagged lower unit margins in Europe and North America and again the company confirmed unit margins remained slightly softer due to what was roughly a £5m US dollar transaction headwind, while unit margin growth was seen from nitrile sales in the Asia & Rest of World segment.

Chairman Neil Johnson said as well as the continued investment programme to increase production capacity, the company also invested to strengthen supply chain resilience and procurement flexibility in what is a "relatively volatile" raw material market.

"Notwithstanding ongoing political and economic uncertainty, the group's diversified business means we are well placed to make continued progress and the board's expectations for the full year remain unchanged," he said. "Looking to 2019, we remain cautiously optimistic about the future prospects of the group."

He said growth capex was expected to yield returns in both geographic segments and management will continue to "explore both bolt-on and transformational acquisitions in a disciplined manner".

Management announced an interim dividend of 4.0p, up 8% from the 3.7p paid a year ago and just under a third of the forecast full year 2018 dividend of 12.9p.

Shares in Synthomer rose 3.3% to 537p after almost two hours' trading on Monday morning.

Analysts at UBS said that with consensus adjusted pre-tax profit looking for £139m, the company needs to generate £63m in the second half, "which is a clear step-up on 1H growth".

"From our perspective the stock looks expensive trading at ~33% premium to peers on 2019E EV/EBITDA while having the lowest EBITDA margin, in the diversifieds sub-sector... M&A optionality remains but we think value-creation may prove difficult given the current multiples being paid in the industry," UBS said.

Broker Canaccord said that compared with its estimates, profits in the first half were higher in Asia and softer in Europe than it had expected.

Peel Hunt said its forecasts were unchanged for full year PBT remained at £140.0m and EPS of 31.6p versus consensus of £138.5m.