The outlook is looking brighter for Synthomer
Chemicals firm Synthomer (SYNT) looks very tempting at the current price following a big sell-off over the past year.
The firm’s share price dropped from around 530p a year ago to 280p last month and saw the stock trade on nearly its lowest rating in a decade, while its level of debt compared to how much it’s earning is expected to double.
But with the business on the cusp of global expansion as it aims to keep up with soaring demand for its products, investors with a long-term view may want to take advantage of the firm’s cheap valuation.
The chemicals sector has historically been a good place to invest with significant share price gains over the past decade and occasionally generous dividends.
But chemicals companies have been caught up by concerns over a global economic slowdown in the past year, and some in the market think this may feed into weaker demand for chemicals products.
Synthomer has tried to expand significantly to keep up with demand for its speciality products, sought after due to many factors such as urbanisation, ageing demographics and stricter legislation.
The firm supplies aqueous polymers to companies, which help create new products and boost the performance of existing ones, such as footwear insoles, condoms, packaging tapes, carpets and waterproofing products.
While strong on the consumer side, investors had questioned Synthomer’s growth prospects given its lack of real penetration into the industrial market.
But the proposed deal to acquire Omnova Solutions, an American speciality chemicals business operating in sectors like construction and oil and gas, could make the market reappraise Synthomer.
As well as the US, Omnova has manufacturing and technical facilities in Europe, Thailand and China.
Analysts at UBS believe the acquisition will help Synthomer sell more products in the US, and help it expand its facilities in Europe.
Synthomer is also forecast by analysts at Canaccord and Numis to have a much stronger second half of this year as market conditions are set to improve.
That combined with its completed upgrades to facilities in Germany and Malaysia means the firm will have greater capacity to meet demand for its products.
Its net debt-to-earnings ratio is expected to increase next year to between 2.2 and 3-times as the Omnova deal is completed.
But Synthomer has a clear plan to get this down below 2-times by the end of 2021.
Its management team has a disciplined approach to M&A, with a ‘conservative capital’ policy meaning it’s unlikely to ever be reckless in the pursuit of growth.