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Its products are used in many ways and earnings should keep growing
Thursday 22 Mar 2018 Author: Lisa-Marie Janes

Chemicals business Synthomer (SYNT) looks really interesting as it executes significant expansion to deal with rising demand. Although it is spending money to expand, we believe the benefits will far outweigh the costs over the long term.

Synthomer supplies aqueous polymers to aid the creation of new products and boost the performance of existing ones in various sectors including construction, paper and textiles.

In plain English, its products are used in many different places such as footwear insoles, condoms, packaging tapes, carpets and waterproofing products.

MULTIPLE DEMAND DRIVERS

Demand is growing for speciality chemicals and an enhanced product portfolio due to urbanisation, ageing demographics and more stringent environmental legislation, according to the company.

The £1.66bn business is planning to expand its nitrile latex site in Malaysia by late 2018 to address a burgeoning market, which is growing 8% to 10% every year.

Higher output levels of styrene-butadiene rubber SBR latex are being targeted in its Marl, Germany site to take advantage of opportunities in the foam market.

Its Finland site is being upgraded to focus on the growing speciality paper and packaging markets, instead of graphic paper.

And in the US and Germany, Synthomer is expanding its acrylic lines capacity via new speciality acrylic lines by early next year.

Canaccord Genuity analyst Alex Brooks estimates group volumes will increase by 30% between 2016 and 2020, driven by the capacity expansion, bolt-on deals, as well as new formulations and products.

He estimates that additional acrylic capacity in the US and Germany and extra nitrile capacity in Malaysia will account for approximately £15m more pre-tax profit going into 2019.

Additional capacity in various parts of the world will help Synthomer cope with a downturn in its Asian nitrile market as a result of its largest single competitor expanding in that part of the world.

ACQUISITIONS…BUT NOT TRANSFORMATIONAL ONES

Another lever for growth for Synthomer is through bolt-on acquisitions. Numis analyst Kevin Fogarty says it has the ability to complete up to two bolt-on deals a year as the business isn’t heavily indebted. Net debt-to-EBITDA is currently 1.0-times.

Fogarty is impressed that Synthomer is building a ‘track record’ and says a ‘transformational deal has remained elusive’ due to management’s disciplined strategy for M&A. We like that approach.

Underlying pre-tax profit is expected to rise from £130m in 2017 to £139.2m in 2018, before increasing to £150.4m in 2019 according to Reuters data.

The shares currently trade on 14.6 times forecast earnings for 2018 and offer a 2.7% prospective dividend yield. (LMJ).

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