EUR 850.00 For Business Accounts Only

Morningstar | Solid Start For Lanxess in 1Q Despite Headwinds; Shares Undervalued

No-moat Lanxess reported solid results in the first quarter with EBITDA up 2% over 2018 and margins improving slightly despite its high exposure to the automotive industry, Europe, and China. The company quantified its 2019 guidance, which is for EBITDA of EUR 1.0 to EUR 1.05 billion, roughly flat over the previous year. This is broadly in line with our view and consensus, hence, the stock is having a muted reaction to results. Nothing in the quarter has altered our long-term thesis. Consequently, we maintain our EUR 61 fair value estimate. At current levels, the shares look undervalued.

Our near-term view is for a flat performance despite a weaker economic environment given Lanxess’ business is more resilient now than a few years ago. Despite high exposure to the automotive industry, we don’t expect a sharp deterioration in results given a significant component of automotive demand is either for replacement products or high-performance plastics, which are growing above industry production rates because of the light-weighting trend. Further, we expect near-term results to be supported by the recovering Saltigo business and synergies from the Chemtura acquisition. Saltigo is part of the advanced intermediates segment, which reported a 12% increase in EBITDA in the first quarter, with a 140 basis point increase in the margin. Synergies are primarily affecting the specialty additives segment, which reported a 90 basis point increase in the EBITDA margin during the quarter. The final part of our near-term view is demand support in China from stimulus measures, which we expect in the second half. Lanxess confirmed it had not been affected yet by the Chinese government stimuli.

We continue to expect Lanxess to achieve its 2021 targets for EBITDA margins of 14%-18% through the cycle with cash conversion in excess of 60%. In our view, swapping the volatile and capital-intensive Arlanxeo business (fully divested in 2018) for higher-margin, less volatile Chemtura (acquired in 2017) has already done the heavy lifting. Further, improving market structures in bromine and polyamide 6 should solidify performance in the targeted range.

For details about our Lanxess outlook, please see “Out With The Old, In With The New Lanxess” published in March 2019.