SPCM : More normative growth in 2018, favourable to credit metrics

Publication date: 15/05/2018 - Writing date: 15/05/2018 - - In 2017, SNF recorded a significant increase in its volumes but EBITDA (-1.8%) was hard hit by falling selling prices and sharply high commodity costs. EBITDA margin contracted to 14.4% (vs. 17.3% in 2016) but remained satisfactory. 2018 earnings will probably benefit from strong volume momentum across all the market segments. Moreover, the price hikes announced in 2017 and early 2018 are expected to materialise in earnings and boost margins. Although FCF is due to remain negative, we expect in 2018 a fall in leverage driven by an improvement in EBITDA. - We are upgrading our Neutral recommendation to Buy. We still favour the company's long-term outlook and management indicated that it had no plans to refinance its 2.875% 2023 'BB+' notes in the short term. Assuming a refinancing in one year at the next call price of 100.719% from 15 June 2019, we calculate a YTC of 1.8%, above similarly-rated French companies in our coverage. - - >Support factors - A polyacrylamide market leader: SNF claims to control 47% of global polyacrylamide (PAM) production capacity.Resilient demand: SNF's average annual volumes have increased by 9% since 2008 with a maximum decline of 3% in 2009. Volumes rose by 24% in 2017 (+7.4% in 2016) chiefly driven by brisk demand from the oil & gas market (22% of sales). In a buoyant economic environment, volumes are expected to grow further in 2018.Broad geographical spread: sales are split across North America (40% of sales), Asia1ePacific (25%), EMEA (27%) and South America (8%).Limited dividends (less than € 10m annually) and moderate external growth (small and medium-sized deals).Adequate liquidity position: € 361m at the end of 2017 and significant headroom within bank covenants.Points to watch - Exposure to raw material prices: SNF manufactures its products with acrylonitrile which is obtained from a petroleum derivative propylene. The rise in oil prices in late 2016, and therefore in raw materials, caused a significant contraction in margins. Thus, EBITDA margin went from 17.3% in 2016 to 14.4% in 2017. The increase in commodity prices is expected to be more moderate in 2018 which should help the group improve its margins (anticipated at 14.7%).The potential risk of replacing PAM, which accounts for most of group sales (81% in 2017), by other technologies such as synthetic flocculants or polymers. However, the group believes that PAM is currently the most cost-effective polymer.Weak FCF generation: SNF burned through FCF of -€ 218m in 2017 (after +€ 12m in 2016, -€ 3m in 2015), chiefly owing to significant investments to increase capacity (€ 363m in 2017).