EUR 850.00 For Business Accounts Only

Morningstar | SOLB Updated Forecasts and Estimates from 17 Aug 2018

No-moat Solvay reported good results in the second quarter, with EBITDA ahead of our expectations in all segments. Second-quarter underlying EBITDA of EUR 618 million was down 3% on currency headwinds and a tough comparable. However, organic underlying EBITDA growth was up 4% in the quarter and 6% for the first half, which is right in the middle of 2018 guidance for growth of 5%-7%. We don’t expect to make a material change to our forecasts or EUR 95 fair value estimate. At current levels, the shares look overvalued.

In advanced materials, first-half organic underlying EBITDA growth was 5% (negative 3% after currency effects). Growth was driven primarily by specialty polymers for automotive applications and composites for commercial and military aircraft. We expect strong growth in the medium term in specialty polymers, owing to Solvay’s ability to capitalise on the lightweighting trend with its market-leading portfolio of polymer technologies. High growth in composites should continue in the next one to two years as production of the Leap engine and F-35 fighter jet ramps up.

In advanced formulations, first-half organic underlying EBITDA growth was 17% (2% after currency effects). The sharp uptick in organic growth is coming from the oil chemicals business in Novecare, which is heavily exposed to the U.S. shale oil and gas market. Unfortunately, this also results in the largest currency headwind, owing to the depreciating U.S. dollar versus the euro. We expect the current recovery in oil and gas to peter out in 2019 as global oil prices cool with increased production from U.S. shale.

In performance chemicals, first-half organic underlying EBITDA growth was negative 3% (negative 9% after currency effects). Higher energy and freight costs in soda ash continue to drive the negative print, with modest pressure from soda ash prices. Peroxides was the bright spot, with the new plant in China ramping up in tight market conditions. As soda ash is the main driver of this segment, we have modest growth expectations, given that new low-cost soda ash capacity in the market should weigh on prices and margins, particularly in 2019 as annual contracts are renegotiated.