EUR 850.00 For Business Accounts Only

Morningstar | EVK Updated Forecasts and Estimates from 16 Apr 2019

No-moat Evonik shares traded up 5% intraday after the company announced a better-than-expected sale price for its methacrylates business and a sustainable annual cash flow increase of EUR 100 million from pension reimbursements. The pension reimbursement was a surprise and provides much-needed security for dividend coverage with loss of the methacrylates cash flow contribution. Fourth-quarter results were in line with expectations, but guidance for 2019 is slightly lower than our forecast. We are likely to trim our near-term forecast, but this is offset by the methacrylates sale. Consequently, we don’t expect to change our EUR 29.50 fair value estimate materially. At current levels, the shares appear slightly undervalued.

Evonik announced the sale of its methacrylates business for EUR 3 billion to Advent International, a private equity company. This represents an enterprise value/EBITDA multiple of 8.5 times average EBITDA over 2016-18. This is a good price for the business, as we previously estimated a sale valuation of EUR 2 billion-2.5 billion based on 7-8 times EBITDA. We think our view was in line with consensus, leading to a positive reaction in the share price. The transaction is expected to close in the third quarter. Evonik plans to use the proceeds to strengthen its balance sheet, fund the soon-to-close PeroxyChem acquisition, and build a new polyamide 12 plant in Marl, Germany.

Evonik reported 2018 EBITDA of EUR 2.6 billion, meeting guidance for EUR 2.6 billion-2.65 billion. The outlook for 2019 is muddied by the methacrylates divestment, PeroxyChem acquisition, and change in lease accounting due to adoption of IFRS 16. Evonik is guiding for EBITDA to be slightly lower or stable in 2019. In this context, slightly lower means a decline of 1%-10%. On our best apples-to-apples comparison, our current estimate is for flat EBITDA in 2019. We expect to trim our estimates in the nutrition and care segment due to lower expectations for methionine prices and higher ramp-up costs for the new methionine plant in Singapore.