Personal care is key to Elementis growth

Trading has been tough in recent years for the company, but long-term growth opportunities exist. What's more, a combination of remedial action to improve performance, a turn in key end markets, and news of the major acquisition of SummitReheis earlier this year, suggest profits could be set to head back upwards, which we think will take the shares in the same direction.

There is no denying that the past two years have tested the speciality chemicals group's three businesses. The year 2015 threw up challenges linked to the collapse in oilfield demand, US dollar strength and volatile trading patterns in China. Last year things got worse, with volumes and margins in decline at the group's chromium division, again partly as a consequence of a strengthening greenback, which bumped up raw material (chrome ore) costs and fed through into a period of de-stocking. Trading was tougher still at the surfactants division, where constant-currency sales were down by almost a fifth due to faltering end markets in Asia.

The good news is that chromium prices started to pick up towards the end of last year, and are forecast to stabilise as competitive pressures ease and inventory levels start to rebuild. And projections for long-term growth are highly favourable. The global automotive chromium market, for example, is expected to reach $2.5bn by 2025, according to a new report by Grand View Research. That's an annual growth rate of 5.9 per cent from 2016 to 2025. However, short-term trading is likely to be flat. Although Elementis has started to pass through a greater proportion of cost increases to customers, management thinks that underlying chromium profitability this year will be comparable to 2016.

Lower oil prices reduced demand in the group's energy business by around 16 per cent last year. Weakening demand was mainly linked to North American drilling, although the group noted "some recovery in volumes versus the second half of 2015 as the oil price rise boosted activity". With the rig count building steadily, particularly in the US, the group should benefit from increased capital outlay through the rest of this year.

There's another structural growth story worth highlighting; one linked to the continuing growth in median and disposable incomes in emerging markets, particularly in Asia. Indeed, the strongest trading last year was attributable to the personal care business, part of the speciality products division, which achieved 14 per cent growth in constant-currency sales. The sales surge was particularly noticeable in Asian markets, a reflection of rising demand for aerosol antiperspirants and colour cosmetics.

This is where the deal to acquire SummitReheis takes on significance. The $360m deal, which completed last month, provides a complementary fit with the existing personal care business. SummitReheis provides a range of high-margin active ingredients and materials tailored for use in personal care, pharmaceutical and dental products - all growth areas for the rapidly expanding dynamic provided by Asia's mid-tier consumers. The only drawback is that the hefty outlay for SummitReheis effectively sounds the death knell for special dividends this year (Elementis has a policy of paying out half-year-end net cash in the form of a special dividend), although the group remains strongly cash-generative.

This year is not without challenges, but management notes that "end-markets appear healthier than in the past couple of years" and that the group will continue to focus on self-help measures, including product rationalisation - ergo the prioritisation of products with the greatest growth potential - together with continued improvements to the supply chain; the focus is squarely on reviving margins.