EUR 850.00 For Business Accounts Only

Morningstar | Normalization in Key Products Continues for Covestro in 2Q; EBITDA Down 53%

No-moat Covestro reported second-quarter EBITDA of EUR 459 million, down 53% over the prior-year period. This was largely expected because of the normalization in the polyurethane and polycarbonate markets. However, the stock is trading up modestly, which we think reflects the company’s confirmation of 2019 guidance for EBITDA of EUR 1.5--EUR 2.0 billion. Concerns over the outlook were rising after BASF, a major polyurethanes competitor, revised its 2019 guidance down significantly earlier in the quarter. 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.

In the second quarter EBITDA was down 71% in polyurethanes and 46% in polycarbonates because both segments experienced double-digit declines in prices with normalizing market conditions. The coatings, adhesives, and specialties segment was the bright spot with 8% EBITDA growth during 2018. However, this was boosted by Covestro’s increased ownership in a joint venture. Core volumes in the segment were down about 5%.

Covestro expects EBITDA of about EUR 410 million in the third quarter, implying another more than 50% year-over-year drop. In the fourth quarter, Covestro will have fully lapped the period of extremely high profitability. End-market trends are mixed. In the first half, the automotive industry developed much weaker than expected, while construction, wood, and furniture were better than expected. For the full year, Covestro is expecting a significant decline in the electrical/electronics and automotive industries.

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