Morningstar | Solvay's 3Q in Line, but Cracks Are Showing in Outlook; Shares Fairly Valued
No-moat Solvay reported third-quarter EBITDA of EUR 574 million, up 4% over 2017 and in line with consensus but slightly better than our expectations. Guidance was confirmed. Year to date, EBITDA grew 6% organically, which is in line with Solvay’s 2018 outlook for 5%-6% growth. However, the pace slowed in the third quarter. Third-quarter volume growth was 3% compared with 5% in the first half. Further slowing looks likely. Demand for oil and gas applications in Novecare stabilized in the third quarter after torrid growth in the first half. This fits with our call for the recovery in Solvay’s oil and gas business to peter out in 2019. We don’t expect to change to our EUR 95 fair value estimate. At current levels, the shares look fairly valued.Advanced materials EBITDA was down 1% from 2017. Composite materials was the strongest business line with sales increasing 13%. Aerospace volume continues to be buoyed by the ramp-up of the F-35 and increasing demand for single-aisle jets while headwinds on the larger legacy planes (777 and A380) are gradually easing. Specialty polymers were negatively affected by lower demand for smart devices. Similarly, sales in specialty chemicals were down due to the phase-out of fluorinated insulation blowing agents plus lower demand for automotive catalysts due to the shift from diesel to gasoline.
Advanced formulations EBITDA was up 9% over 2017. Volume was solid, but demand from oil and gas markets eased. Coatings and home/personal care continued to be strong for the Novecare business. Technology solutions has seen double-digit volume growth year to date due to strong performance in applications for mining.
Performance chemicals EBITDA was up 8% over 2017. Soda ash volume and prices improved sequentially but were still down compared with the prior-year period. Peroxides and Coatis drove most of the increase. Peroxides is benefiting from a tight market in Asia while Coatis is seeing improved demand in Latin America.
Solvay is engaged in chemical and plastic businesses worldwide. Co. offers chemical products such as advanced materials, barium strontium, calcium chloride, caustic soda, chlorinated products, fluor, peroxygen products, polyglycerols, precipitated calcium carbonate, soda ash, and sodium bicarbonate. It also provides specialty polymers, such as Spire ultra polymers, Solviva biomaterials, and sulfone polymers. Co. structures its activities around five operating segments: Advanced Formulations, Advanced Materials, Performance Chemicals, Functional Polymers and Corporate & Business Services, each with its own specific business model and each comprised of Global Business Units (GBUs).
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