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Questor: Synthomer’s bosses may not have managed Ineos-style growth but the stock is a buy
Questor share tip: unable so far to strike transformative deals, Synthomer's top team are content for the moment to get more out of their existing assets
Considering that the pair at the top of Synthomer spent many years working at Ineos, investors might have expected more fireworks by now.
Sure, shares in the FTSE 250 constituent have risen by roughly 50pc in the four years since Calum MacLean arrived as chief executive, even taking into account their slide last autumn.
And even though the company is still better known by its former name Yule Catto, it has moved on from its heritage in speciality chemicals to focus more closely on polymers used in industrial coatings, construction and latex gloves.
Yet the takeover spree that might have transformed a business whose market value today is a modest £1.3bn has not transpired – yet. Compared with the swashbuckling creation of Ineos from the offcuts of BP, ICI, BASF and Dow Chemical, Synthomer’s reinvention appears to have been positively restrained.
It must be hard for MacLean, who built Ineos from 1998 side by side with Sir Jim Ratcliffe, now Britain’s richest man, not to feel slightly frustrated. So too Synthomer’s finance director, Stephen Bennett, who followed MacLean over soon afterwards.
The problem has been twofold. First, there have not been enough acquisition targets out there to move the dial. And those that would have made a significant difference to Synthomer came with a lofty price tag. The market correction of the last quarter may have changed that position, injecting a dose of reality into a sector that had been trading well north of historic multiples.
At least when something does come up, Synthomer is well placed to raise debt and issue paper to pay for it. In November MacLean pointed out that half of the group’s growth had been coming from bolt-on deals, with the rest organic. As for something bigger, he remains confident, but it is a case of wait and see.
In the meantime, Synthomer is spending more on its existing operations. The City hopes to soon see the fruits of record capital expenditure of £70m in 2018. MacLean has indicated the same figure again in 2019. Analysts at Berenberg, the bank, expect earnings growth of 7.5pc this year – double the level pencilled in for the Europe Stoxx 600 Chemicals Index.
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One project has been to expand capacity at a nitrile latex factory in Malaysia. Greater awareness of health and hygiene has sent demand soaring for rubber gloves. Volume growth of 10pc a year is tipped to accelerate to 15pc. There have been some problems with overcapacity but nitrile latex occupies a sweet spot.
It is more puncture-resistant and said to cause fewer allergic reactions than natural rubber and is favoured for medical applications. Berenberg has suggested that if capacity tightens to 2016 levels, group earnings could rise by 5pc.
Another project, in coatings, is to build made-to-order speciality acrylic lines at Synthomer’s dispersions plant in Germany. In dispersion, dry powder or pigment is evenly mixed through a liquid. Margins have been falling in this segment because of higher input costs.
By contrast with some of their rivals, at least MacLean and his team have the scope to renegotiate selling prices on a monthly basis to keep pace with costs, even if customers have been pushing back.
In December, analysts at HSBC reined in their group forecasts because of weaker trading conditions in Europe, reducing sales estimates by 3pc this year and next and cutting earnings-per-share expectations by 8pc and 3pc.
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Bearish comments on global growth from the International Monetary Fund last week don’t help the cause of any international company, although, with three quarters of its business in Europe and North America, Synthomer is not as exposed to China’s slowdown as some.
The City has also trimmed its target price on the shares, but Questor feels there are gains to be had. The stock trades on 11 times this year’s forecast earnings, making it look cheap compared with a European sector average of about 15 times.
Synthomer may not have transformed itself through deal-doing but it is certainly in better shape than when the Ineos duo arrived. Even if bigger takeovers are not imminent, the 2018 decline in the shares makes now an opportune time to get on board.
Questor says: buy
Ticker: SYNT
Share price at close: 365.8p