You are here:

FTSE 350 outlook: chemicals

Created:
21 January 2008
Written by:
Richard Hemming

And then there were three. Merger and acquisition activity has shrunk the chemicals sector remarkably over the past three years. In 2005, there were 10 chemicals companies in the FTSE 350 Index, which reduced to six in 2006 and four in 2007. After the prolonged £8bn takeover of Imperial Chemical Industries (ICI) by Dutch rival Akzo Nobel last year, the remaining players are wrinkle cream manufacturer Croda International , catalyst maker Johnson Matthey and producer of high-performance thermoplastic (PEEK), Victrex .

Advertising

But these three are part of the broader European chemicals sector, which produced a stunning performance last year. The Dow Jones Europe STOXX Chemicals Index returned close to 30 per cent in 2007, well above the broader Dow Jones Europe STOXX Index, which returned just under 3 per cent.

A key to the strong performance has been buoyant European and global economic activity and relatively low levels of supply. But industry analyst at Charles Stanley, Jeremy Batstone-Carr, says that due to factors such as falling housing prices in the US, global economic growth is forecast to fall, which does not augur well for the chemicals sector. Also of concern is the increasing capacity in Asian chemical factories over the past year, although this has been mitigated to some degree by plant shutdowns in Europe.

Within the UK sector, though, Croda remains a good bet as benefits come through from the company's purchase of the surfactants business, Uniqema, from ICI in the second half of 2006. The business has now been in Croda's ownership for about a year, so investors will be taking a very close look at Croda’s next set of results.

Johnson Matthey’s strong share price performance last year is partly attributable to continuing speculation that it is a bid target, especially after the ICI takeover. Potential acquirers include US company Praxair and more recently Dow Chemical, although after a 14 per cent rise since the start of December the shares are hardly a bargain trading on a forecast earnings multiple close to 18.

Victrex has been performing well despite headwinds from a weaker US dollar. However, we continue to believe that its business model is vulnerable due to a lack of product diversity and brokers citing poor patent protection for PEEK.

Company name Price (p) Mkt val. (£m) P/E ratio Div. yld (%) 12M price chng.(%) Last IC view
CRODA INTERNATIONAL 477.25 649.98 15.9 3.06 -19.72 Good value, 670p, 5 September 2007
JOHNSON MATTHEY 1850 3971.5 22 1.85 23.75 Good value, 1,653p, 3 December 2007
VICTREX 612.5 504.08 13.6 2.82 -21.47 High enough, 608p, 11 December 2007

MORE FTSE 350 OUTLOOK SECTORS

See also:

Aerospace & defence

Housebuilding & construction

Engineering & diversified industrials

Mining

Oil & gas

Forestry and paper

For a full table of contents for the FTSE 350 Outlook series, click here.

  • Back to top

GLOBAL BANKING CRISIS

Get the latest news here!

Promotional Feature

The world's oldest pets

We all want our pets to live long and happy lives. One of the easiest ways to help your four-legged friend get over life's many hurdles is to get them covered with pet insurance.

by Sainsbury's

Promotional Feature

Turkey Resort Round-up – Beyond Istanbul

Holidays to Turkey tend to focus on the country's magnificent coastline. Dotted with coves and lined with sandy beaches, Turkey is a sun-worshipper's paradise.

by TUI