SPCM : Back to EBITDA growth in 2017 as volumes rebound

We maintain our Stable credit opinion. 2016 EBITDA (-3.6%) was affected by lower selling prices and R&D investments, although SNF reported solid volume growth and maintained a record EBITDA margin of 17.3%. We expect better results in 2017 thanks to the positive volume momentum in all market segments (and in particular in the Oil&Gas segment which started to recover in 2H16) and price increases, which will partly mitigate higher raw material costs. Hence the EBITDA margin should compress from 17.3% in 2016 to around 16% in 2017 but we forecast a 4% EBITDA growth to EUR 374m in absolute terms. Despite the improving operating trend, the leverage should mildly rise to 2.6x owing to EUR 20m of refinancing costs, EUR 30m of bolt-on acquisitions and EUR -57m of negative FCF assumed in our model. - We reiterate our Neutral market recommendation. While we continue to like the long-term prospects of the company, we think that the 2023 notes (BB+, Ytw of 1.6%, z+179 bp) are fairly valued at current levels. Their spread is below the average spread of a sample of bonds with similar maturities and BB-ratings (192 bp). In the Chemicals sector, SPCM’s 2023 notes trade in line with the 2023 notes of K+S (BB+, Ytw of 2.0%, z+169 bp) and Ineos (Ba2/BB, Ytw of 1.6%, z+184 bp), respectively. The 2025 USD notes (Ba2/BB+, Ytw of 4.5%, z+261 bp) look more attractive with a spread premium of 82 bp over the EUR 2023 notes for 2 years of additional maturity. - >Support factors - • Leading position in the polyacrylamide market (SNF claims to control 46% of global PAM production capacity).• Resilient demand (volumes expanded at a CAGR of 9% over the past nine years, with a maximum decline of -3% in 2009). Volumes recovered by +7.4% in 2016 (after -1.4% in 2015) thanks to the rebound of the Oil & Gas end-market (18% of total sales) and should continue to grow in 2017.• Good diversification by region (EMEA accounted for 29% of 2016 sales, North America 37%, Latin America 10% and Asia Pacific 24%) and end markets.• Limited dividend payments (less than EUR 10m annually) and moderate external growth (small and mid-size deals).• Comfortable liquidity position and significant headroom within bank covenants. Points to watch - • Given the concentration of activities (81% of sales linked to PAM), one of the main risks is the potential replacement of PAM by other technologies (flocculants or synthetic polymers). However, SNF thinks that PAM has the best cost/effectiveness profile today.• Exposure to commodity prices, especially propylene. The impact of commodity prices was materially positive in 2015, and slightly negative in 2016. EBITDA margin should narrow from 17.3% to c. 16% in 2017 on the back of higher raw material prices.• Weak FCF generation (EUR -3m in 2015, EUR 4m in 2016, EUR -57m forecast for 2017e) owing to major expansion investments.