Global Chemicals Weekly:News,views and valuation
European Chemicals- Q3 16 preview.
Robust demand trends have continued through Q3 (China, Europe surprisingpositively) with self-help also remaining supportive and more than offsettingany tail-off of modest raw material benefits. Continued weak spots in ag,energy/oil and Latam are expected. Guidance (numbers/tone) will be the focusand with many names likely to beat Q3 consensus some mgmt teams will beable to provide upgrades despite macro/political uncertainties. We expectconsensus upgrades for many names. With self-help, industry supplyconstraint and M&A we continue to see Chemicals as an attractive sector. Toppicks: Akzo, Arkema, BASF, Covestro, JMAT, Symrise.
Lanxess (LXSG.DE, BUY).
The acquisition of Chemtura using Lanxess's strong balance sheet will upgradethe portfolio with a greater focus on specialties, which we expect to increasefurther with full exit from the Arlanxeo JV (synthetic rubber) medium-term.
Acquisition risk has now been removed and we see the Lanxess story nowfocused on integration, cost cutting and delivery of synergies, wheremanagement has a proven and strong track record. We have materiallyincreased our EPS forecasts and with valuation at 13x 2018 P/E (the first fullyear with Chemtura), strong EPS growth and a higher margin, less cyclical andmore specialty portfolio we see value and upgrade to Buy.
OMNOVA Solutions (OMN.N, BUY).
OMNOVA shares fell 15% following its Q3 release as EPS missed by $0.03, or18%. We note OMNOVA shares were up nearly 70% from their June ’16 lows.
The earnings miss was due to delays in customer plant start-ups and newprojects which negatively impacted Engineered Surfaces. This was partiallyoffset by better than expected results in Performance Chemicals where volumegrowth in key specialty product lines such as construction materials, oil & gas,and elastomeric modifiers drove a 16% increase in EBIT. With continuedstrength in specialties, improved price/mix and cost actions driving 40% EPSgrowth in '16 and valuation an attractive 7.2x '16E EBITDA, we reiterate Buy.