EUR 850.00 For Business Accounts Only

Morningstar | Solvay Company Report

Belgium-based Solvay has largely completed its transformation to a specialty chemicals company, although there are still some commodity chemicals where the company has a leading market position, notably soda ash and peroxides. However, we still don't see a moat, given that high capital intensity continues to weigh on ROIC, leaving us with limited confidence in the company's ability to generate sustained returns above the cost of capital. A EUR 150 million cost-cutting plan was announced in 2018 to adjust the company's cost base to its new, leaner business portfolio. Successful execution of said program, with some evidence that current high margins have staying power in an economic slowdown, would go far in building our confidence around a potential moat for Solvay. Solvay's sales are broadly diversified geographically and by end markets, although automotive and aerospace tend to take centre stage. In addition, oil and gas is often topical, given Solvay's exposure to the highly cyclical U.S shale market. Sales are split fairly evenly between Europe, North America, and Asia. The company's business is segmented into advanced materials (50% of EBIT), advanced formulations (20% of EBIT), and performance chemicals (30% of EBIT). Advanced materials is the most attractive segment, given that it houses the moatworthy and high-growth specialty polymers and composite materials businesses. Advanced formulations is another growth driver for the company, particularly the Novecare surfactants business, but is subject to the whims of the oil and gas market, given that many of Novecare's high-margin solutions are used for stimulation in oil and gas wells. Performance chemicals is the legacy commodity chemical business, but this is by no means a weak link. Solvay is a leading global player in soda ash and peroxides, which generate significant cash for the company. On the other hand, we think the remaining business lines, Coatis and functional polymers, are noncore and will likely be divested over time.