EUR 850.00 For Business Accounts Only

Morningstar | First Signs of PMMA Normalization For Arkema in 4Q; Shares Fairly Valued

No-moat Arkema reported third-quarter results that were in line with consensus and our expectations. EBITDA of EUR 374 million was up 5% over 2017. Guidance for a mid-single-digit increase in EBITDA for 2018 was confirmed, in line with our forecast. Like other chemical companies that have already reported this quarter, Arkema noted a changing macroeconomic environment and continued raw material inflation. We think the most important item in the quarter was Arkema's report of a slight normalization in polymethyl methacrylate, or PMMA, at the end of the quarter. The PMMA market has remained tight for much longer than expected due to production outages that have more than offset new capacity coming on line in 2018. With Arkema calling for further normalization in the fourth quarter, abnormal profitability in this business looks to be coming to an end. This expected normalization is already reflected in our 2019 estimates, where we expect lower margins in the industrial specialties segment. Hence, we don’t expect to make a material change to our EUR 88 fair value estimate. At current levels, the shares look fairly valued.

In high-performance materials, EBITDA was essentially flat with 2017. Volume growth was negligible and prices only increased 1.9% despite rising raw material costs and priority given to price over volume. Consequently, the EBITDA margin was down 50 basis points.

Industrial specialties continued strong with EBITDA up 11% over 2017. We think high prices in fluorogases and PMMA were the main drivers, although thiochemicals and hydrogen peroxide were reported to be robust. We think industrial specialties EBITDA will decline in 2019 due primarily to normalization of the PMMA market. We also think an inflection point is coming in fluorogases, where price increases will no longer offset declining volume in certain products being phased out. In the third quarter, segment volume was down 3.3% over 2017 due to lower selling quotas in fluorogases.

In coating solutions, EBITDA was up 5% over 2017 with solid demand in Asia and the United States. Continued improvement in unit margins of acrylic monomers was the main driver of positive performance. The downstream business remained challenged due to rising raw material prices, particularly for acrylic acid.