EUR 850.00 For Business Accounts Only

Morningstar | Covestro’s EBITDA Down Nearly 60% in 1Q; Shares Fairly Valued

No-moat Covestro reported first-quarter EBITDA of EUR $442 million, down 58% over the 2018 period. This was largely expected so the stock is trading flat. EBITDA was down 75% in polyurethanes and nearly 50% in polycarbonates. The coatings, adhesives, and specialties was the bright spot during the quarter with 7% growth in EBITDA. Guidance for EBITDA of EUR 1.5– 2 .0 billion in 2019 was confirmed. We don’t expect to make a material change to our forecast or EUR 47 fair value estimate. At current levels, the shares look fairly valued.

Covestro continues to be mostly hit by falling prices in polyurethanes, which have normalized from extreme levels in 2018. Flat-core volumes in polyurethanes were decent, all things considered. Polycarbonates did not fare as well. Core volumes fell 6% because of destocking and weak demand from the automotive industry, which accounts for about one third of sales. Coatings, adhesives, and specialties had flat volume growth and slightly improved prices despite a weak coatings industry, which accounts for about half of sales.

Surprisingly, the U.S. was the worst growth performer regionally, with an almost 7% drop in core volumes. Growth was mainly affected by negative growth in the automotive and mattress industries. China was positive with 5% core volume growth, but the Asia-Pacific region was hit by negative growth in automotive and construction. Core volume growth in Europe was negative, with a nearly 6.5% decrease in Germany. The weak automotive market was the main driver.

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