Shale boom helps Elementis

Elementis shares have fallen victim to the summer equity market sell-off amid speculation about the level of demand next year, especially from the developed world. However, the company's third-quarter trading statement should have allayed these concerns. In fact, improved earnings in all three divisions and strong cash flow have kept the chemicals company on course to match full-year underlying earnings estimates.

At the core speciality products division, strong demand and market share gains, particularly in North America, drove sales up 12 per cent and kept operating margins above 20 per cent, as they were in the first half. Coatings additives, the largest contributor, delivered an 11 per cent improvement in third-quarter sales, despite some "softness" in southern Europe and slippage in Asia - inflation cutting and energy saving initiatives in China were to blame.

And the craze for shale gas and the hydraulic fracking needed to release it, was key to an impressive 48 per cent surge in sales to the oilfield drilling sector, and expanding the Charleston facility should drive further growth next year. Elsewhere, demand for chromium chemicals used in industries such as aerospace and automotive has been "robust" - up 8 per cent - especially in North America, which now accounts for 63 per cent of total chromium sales.

Numis Securities says…

Buy. Aside from sales of Asian coatings additives moving into reverse, everything is going well and there is an assured aspect to the good results likely for 2011. Doubts will remain regarding 2012, given that group order books extend out only to about 90 days, but it's worth noting that analyst forecasts for next year do not reflect possible share buy-backs or EPS-enhancing infill purchases. Also, the track record of the current management team is good. We expect adjusted profit before tax of $141m in 2011, giving adjusted EPS of 21.6¢, up from $96m and 15.2¢ last year, and maintain our 211p target price.

Altium Securities says…

Buy. The company's third-quarter update was reassuringly solid. Ongoing cost-cutting programmes are delivering margin upgrades, but the question is how much longer this can last. A diversified portfolio of customers offers some defence against any downturn as do its unique operating assets, the value of which is not encapsulated in the lowly multiple of cash profits to enterprise value. As long as macro conditions deteriorate no further, capital expenditure programmes initiated over the course of 2010 and pricing power should deliver mid-single-digit revenue growth, helped by a further one percentage point improvement in the operating margin.