(Alliance News) - Analysts at Berenberg on Wednesday said that leverage concerns at Synthomer are "understandable but manageable", after a recent trading update saw the firm lower its interim expectations.
The Essex, England-based chemicals manufacturer said in the first six months of the year, its revenue was GBP1.1 billion, down 17% from GBP1.33 billion a year prior.
Earnings before interest, tax, depreciation and amortisation is expected to be in the range of GBP72 million and GPB74 million, falling from GBP173.1 million the year before. Net debt at June 30 was around GBP795 million.
Shares fell over 8% on Tuesday in reaction to the trading update, before rising 11% to 80.55 pence each in London on Wednesday afternoon.
"The market appears to have again taken fright at Synthomer's elevated net/Ebitda, which reached 5.5x (compared to 30 June covenants of 6.0x and year-end covenants of 5.0x)," Berenberg analysts said of Tuesday's share price drop.
Conversely, Berenberg argued that leverage remains "very manageable".
It added that while expectations for group revenue and Ebitda were "a touch lower than the market anticipated", they were "broadly consistent" with the board's outlook.
Synthomer said it does not anticipate material recovery in customer demand before the end of the year, but is confident of making sequential progress in the second half of the year.
Of particular encouragement over the first half was an improved performance in the company's coatings and construction solutions segment, consistent with the rally in coatings producers.
Synthomer noted that "robust pricing" and a strong focus on margins helped it mitigate "substantially lower volumes."
"The performance in the rest of the business is at trough", Berenberg said.
While other segments have faced a more difficult six months, most are experiencing remediable problems.
For the acquired adhesive solutions segment, which on Berenberg's estimates made approximately breakeven Ebit in the half compared to GBP23 million in financial 2023, much of the decline appears to be because of plant reliability issues and quality control, "which are fixable problems".
Berenberg said: "Our forecast recovery in Ebitda to levels still modestly below mid-cycle by 2025 (GBP250 million) leaves leverage very manageable, in our view. There may be other options available while the company waits for earnings recovery in 2024: we could imagine minor divestments, or a request for a delay to the just under GBP37 million fine payable to the EU for styrene acrylic purchasing practices, currently due in H2."
By Holly Beveridge, Alliance News reporter
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