EUR 850.00 For Business Accounts Only

Morningstar | Solid Results for Lanxess Despite Drag From Performance Chemicals; Shares Undervalued

Once known as the global leader in synthetic rubber for use in tires and automotibiles, Lanxess has transformed its business portfolio. Rising competition from regions with lower feedstock costs left the company in a structurally weak competitive position in rubber, resulting in a disastrous 2013. Matthias Zachert was installed as CEO to lead the restructuring. Strategic changes were successful, culminating with the formation of the Arlanxeo joint venture with Saudi Aramco in 2016 and full divestment of the business in 2018.Lanxess is shifting toward speciality chemicals, and the acquisition of Chemtura was a major step toward this goal. The combined specialty additives businesses of Lanxess and Chemtura contribute around 30% of group EBITDA. We typically view additives as an attractive market, given that products are performance-priced but represent a small cost in the final product, require high levels of know-how and technical service, and have low capital requirements. The remaining portfolio is widely diversified. The advanced intermediates segment serves a variety of end markets, with agrochemicals being the largest at a third of segment sales. Lanxess has high market shares and a competitive cost structure for manufacturing these intermediates, which has resulted in strong returns in this segment despite standardised products. We expect performance to improve over time with better conditions in agricultural markets. The performance chemicals segment contains a patchwork of unrelated businesses, including biocides for disinfecting/sterilisation, inorganic pigments, leather chemicals, and water treatment. We think biocides are attractive, and Lanxess’ recent bolt-on acquisition here supports this notion. We have a less favourable outlook for leather chemicals, despite the company’s leading market position.The engineering materials segment was carved out of the rubber business and largely produces midgrade engineering plastics. Margins should improve over time as the business moves further into downstream compounds and the merchant exposure to low-value caprolactam is absorbed for captive uses.