Not over for Synthomer

Yule Catto issued a profit warning last June and, despite ditching its historic moniker in December, the newly named Synthomer (SYNT) remains highly sensitive to any shift in volumes. That said, the chemicals manufacturer revealed in last month's update that it had avoided any further trouble in the final months of 2012 and profits should grow again this year, too.

Indeed, trading and profitability remained in line with the expectations outlined at the third-quarter update in November. Demand in Europe, which accounts for well over half of group sales, remains subdued, especially in construction-related areas where its chemicals are used in wall paints, coatings and adhesives. In Asia and elsewhere, the non-nitrile business has done well and even the troublesome nitrile operation, which supplies the synthetic rubber glove market, is negotiating a period of oversupply and price pressure. And it's no wonder management expects full-year underlying pre-tax profit to beat the £96m it made in 2011. Savings from the acquisition of PolymerLatex two years ago should be somewhere around £19m for 2012 - we'll get confirmation alongside final results on 15 March - which leaves another £6m out of the targeted £25m to be found this year.

N+1 Singer says…

Hold. A reassuring, in-line update. We had initially feared that the tough European environment would prompt forecast downgrades in the second half of 2012. The fact that this has been avoided again highlights the relative resilience of Synthomer's core polymer business, where careful management of margins tends to offset occasional periods of volatility in demand. While recognising a significant discount to the sector, we retain a 'hold' stance at this stage, largely reflecting the company's significant exposure to Europe and our lingering uncertainty as to how the competitive situation in nitrile will play out this year.

Barclays Capital says…

Overweight. Synthomer is operating in difficult end markets including coating, paper and construction. European volumes were down by 10 per cent in the first nine months of last year, compared with an 11.5 per cent fall after the first half. Synthomer has been able to cope well in this adverse environment due to margin management and PolymerLatex synergies, while lower raw material costs should help to improve margins. We expect adjusted pre-tax profit of £97m for end-2012, rising to £103m this year, giving adjusted EPS of 21.7p. Synthomer is our top pick in UK chemicals for 2013 with a target price of 269p.