EUR 850.00 For Business Accounts Only

Morningstar | 1COV Updated Forecasts and Estimates from 08 Apr 2019

No-moat Covestro reported fourth-quarter EBITDA of EUR 293 million, down 67% from the prior-year period. Polyurethanes profits collapsed because of unsustainable prices, as we have argued for several quarters. While EBITDA missed consensus and our estimate, the expected deterioration in performance is now largely priced in, given that the shares were down a paltry 3%-4% intraday despite EBITDA falling off a cliff. The shares are also now trading in line with our EUR 47 fair value estimate, which we don’t expect to change materially on the back of fourth-quarter results.

Covestro is guiding for EBITDA of EUR 1.5 billion-2 billion in 2019, essentially half the 2018 level of EUR 3.2 billion. Just a few months ago, our 2019 EBITDA estimate of EUR 2.3 billion was around 15%-20% below consensus. However, we now look bullish versus consensus, which currently sits around EUR 2 billion. We are likely to trim our 2019 estimates but don’t expect this to have a material impact on our fair value estimate. Our thesis called for normalization in Covestro’s business to play out over 2019 and early 2020. However, the situation is obviously unwinding quickly, given fourth-quarter results. Hence, our 2019 estimates will decline but our 2020 estimates will probably increase somewhat.

In the fourth quarter, EBITDA fell 82% in the polyurethanes division as new industry capacities and softer demand caused prices for diphenylmethane diisocyanate and toluylene diisocyanate to crater. The polycarbonates division offered no solace, with a 38% decline in EBITDA. In our view, the polycarbonates division was also overearning due to temporary factors largely related to China’s environmental enforcement drive. Fourth-quarter performance supports this assessment.

For details on our outlook for Covestro, please see "Covestro Has More Room to Fall," published in November 2018.