Yule Catto facing challenges

Shares in chemicals group Yule Catto have slipped fairly heavily in recent months, the victim of both macroeconomic concerns and a mixed set of first quarter results. First quarter profits were "substantially" ahead of last year and management's expectations for the year remained unaltered. However, volatile raw material prices and currency headwinds make the outlook less certain, which is likely to undermine any serious re-rating.

Compared with a strong start to 2011, volumes fell 11 per cent in Europe and North America, depressed by a weak construction sector. Still, better margins are making up for it and volumes were up 14 per cent on a fourth quarter hobbled by destocking - which left operating profit well ahead of 2011's outcome. There's a threat, though. True, Yule Catto expects cost savings from the PolymerLatex acquisition of £15m in 2012, but it makes over half of its money in the chaotic eurozone and, given the strength of the pound, it's currently looking at a £5m hit this year - things could get worse there, too. It's also tough in emerging markets. Here, volumes grew 11 per cent on the previous quarter, but slipped 1 per cent year on year. A struggling health and protection business failed to maintain last year's higher margins and profits there have suffered.

Deutsche Bank says…

Buy. A robust first quarter is testament to the strong market share positions and pricing power of the group and the benefits of the PolymerLatex acquisition. As such, we raise our EPS forecasts for 2012-15 by 1-6 per cent. We think the stock is too cheap given attractive market positions and strong emerging markets exposure. Management is flagging currency risk but, assuming the current spot rate for the year, and that would take around 3 per cent off second-quarter and half-year pre-tax profits - which is not that material and should be offset by pricing and synergies.

N+1 Brewin says…

Add. The update is a bit of a mixed bag in terms of volume movements, currency headwinds and volatile raw material costs. In spite of this, the in line statement again highlights management's ability to manage margins and improve profitability in changeable and uncertain circumstances. We make no changes to our forecasts for adjusted pre-tax profit of £112.5m in 2012, giving adjusted EPS of 23.9p, rising to £121.4m and 25.8p next year. We also leave our recommendation and price target of 255p unchanged.