EUR 850.00 For Business Accounts Only

Morningstar | Growth Baton Within Covestro Passed to Polycarbonates in 2Q; Shares Overvalued

No-moat Covestro reported solid results in the second quarter with EBITDA of EUR 985 million, a 16% increase over 2017 and slightly ahead of our estimates. The company also raised its 2018 guidance. EBITDA for the year is now expected to be above the 2017 level of EUR 3,435 million, whereas previous expectations were for around the same level. The guidance upgrade will cause us to boost our near-term estimates slightly, but we don’t expect to make a material change to our EUR 52 fair value estimate. At current levels, the shares remain firmly in 2-star territory.

In recent quarters, the polyurethanes segment has claimed most of our attention, owing to supply disruptions that have led to bonanza-type price increases, particularly in TDI. However, polyurethanes EBITDA was up a relatively benign 6% in the second quarter over 2017. The absolute profit level remains at sky-high levels, but we are seeing the first signs of normalisation in TDI prices. Accordingly, we maintain our long-term outlook for declining EBITDA in polyurethanes.

With normalisation on the horizon for polyurethanes, the polycarbonates segment is now driving EBITDA gains for Covestro due to a sharp increase in profitability. Second-quarter EBITDA in the segment increased 45% over 2017. Last quarter, we alluded to potential supply disruptions in the polycarbonates market. Indeed, this appears to be the case, and is primarily related to the environmental crackdown in China. Commodity grades in polycarbonates are seeing dramatic price increases, as some Chinese producers are being temporarily shut down or relocated. We don’t expect this to be a long-term issue for the market; in fact, new Chinese polycarbonate production is expected to hit the market shortly.