Ineos : A disruption-resistant formula

>Strengths/Opportunities - Strong market positions INEOS is a leading global petrochemicals group in terms of sales ($ 40bn for the group in 2016, € 12.6bn for the restricted group). It is no. 2 in Western Europe and no. 6 in the US in terms of production capacity.An experienced management team. Jim Ratcliffe has been the top shareholder and chief executive of INEOS since the LMBO which gave rise to the company in 1998. Under his leadership, the group has expanded significantly through acquisitions.A vertically integrated group that optimises its margins. INEOS has three major industrial sites in Europe and the US, which represents 43% of its production capacity. These sites, which are located near the group's other production centres, are easily supplied with local and foreign raw materials through numerous means of conveyance.Access to low-priced feedstocks. In parallel with the introduction of various contracts that secure its supplies, INEOS invested in infrastructure that facilitate the importation and use of cheaper raw materials from the US, underpinning its margins.Strong FCF generation and debt reduction. Despite the forecast deterioration in operating results in 2018, INEOS should be able to record positive FCF that will further drive down its debt. The group should continue to report a leverage ratio below its 3x target (2x estimated in 2017, 2.1x in 2018). - Weaknesses/Threats - Highly cyclical activities. IGH's sales and EBITDA are mainly generated in commodity chemicals (olefins and polymers - 55% of sales and 68% of EBITDA), where demand and competitive pressure are closely linked to economic conditions and raw material prices.Current conditions are near top of cycle, driving development of new capacity. In a buoyant economic environment, INEOS is posting close to top of cycle results, with high margins and utilisation rates. Against this backdrop, producers are prompted to increase production capacities, forecast to rise in 2018 and 2019, which could hamper growth in INEOS' margins and earnings.Acquisition risk. INEOS arose from numerous large-scale acquisitions. With fairly low leverage (2x at the end of Q3 2017, below the group's 3x target) and strong liquidity, the group could be tempted to carry out new transactions.Lack of transparency on intragroup operations. IGH tends to support M&A deals conducted outside the restricted group via intragroup loans. At the same time, the dividend policy seems to be vague and could undermine the group's deleveraging should the payout increase. - Credit opinion: Stable; Market reco: Neutral 23 and 25, Buy 24 - Despite the expected deterioration in operational performance linked to the arrival of new production capacity, which is also impacted by the recent rise in input prices and the depreciation of the dollar, INEOS should be able to maintain a satisfactory FCF and solid liquidity, which will make it possible to contain any deterioration in its credit metrics. In addition, the group has sufficient leeway to finance its dividends and potential acquisitions without jeopardising its current rating. In anticipation of a possible optimization of the financial structure, the 23 and 25 notes offer little potential. On the other hand, the 24 notes, whose yield is higher than comparable, will continue to benefit from INEOS' resilient credit metrics.