EUR 850.00 For Business Accounts Only

Morningstar | Evonik Pre-Releases Strong 2Q With Modest Guidance Upgrade; Maintaining EUR 32 FVE

In accordance with German law, no-moat Evonik pre-released second-quarter results due to a "material" deviance from consensus. EBITDA for the second quarter was EUR 742 million, 7% above consensus and 16% above the prior-year period. We would also describe the results as strong, particularly on margins, but expect increasing raw material costs to claw back some of the margin gains by the end of the year. We will likely adjust our near-term estimates up slightly but don’t expect to change our EUR 32 fair value estimate. Shares are up around 4% at time of writing, just shy of our fair value estimate.

Evonik also increased 2018 EBITDA guidance by 5%, using midpoints. The company now expects EBITDA of EUR 2.6 billion-EUR 2.65 billion, compared with previous guidance of EUR 2.4 billion-EUR 2.6 billion and our estimate of EUR 2.5 billion. While year-to-date performance is solid, currencies have played a factor in the guidance update, as Evonik now expects the U.S. dollar to be stronger, versus the euro, than at the beginning of the year. Consequently, the market may be a bit too excited about the guidance upgrade, in our view. On the other hand, Evonik also stated that free cash flow is expected to be notably higher than 2017. As the cash flow cushion for the dividend is somewhat tight, investors may have taken some comfort with the expected improvement in cash flow performance.

Within the segments, the biggest change in outlook for 2018 was in performance materials, which was modified to “higher earnings year over year” from “not achieve prior-year level”. The change in outlook appears mostly related to continuing tight conditions in the MMA/PMMA market. We have been patiently waiting for normalization in this market to occur due to meaningful new supply coming on line. However, it likely won’t matter much longer, as Evonik plans to offload the business soon. We still think the business can fetch EUR 2 billion-EUR 2.5 billion, or 7-8 times EBITDA.

There was no change in the outlook to resource efficiency, while nutrition and care has moved to “higher earnings” from “slightly higher earnings”. Nutrition and care is benefiting from improved demand in methionine and efficiency gains, in line with our view. We are fans of Evonik’s new internal focus on efficiency gains, as we see the cost structure as bloated. The company expects cost savings of EUR 200 million and synergies of EUR 85 million by 2021.