Synthomer sheds pandemic gains

Synthomer (SYNT) is an example of how short-sighted the stock market can be. Demand for PPE during the pandemic turbo-charged performance elastomers (PE) sales. Synthomer's share price almost doubled. Now PE sales are back to pre-pandemic levels, the share price has almost halved, so we are back to where we started.

The difference between now and before the pandemic is inflation. The cash profit (Ebitda) margin dropped from 26.2 per cent to 13.0 per cent. The need to stockpile raw materials to mitigate against supply chain disruption has also tied up more working capital in the business. Free cash has therefore swung from an inflow of £89.5mn last year to an outflow of £62mn.

The combination of the cash outflow and the £759mn acquisition of Eastman’s Adhesive Resins means net debt has risen to £993mn from £355mn. This acquisition enabled the business to launch a new Adhesive Technology division that generated £131mn of revenue last year. This will diversify the business, and Synthomer insists that adhesives is a higher growth segment.

If the investment in Adhesive Technology is a success, then the business will be a better place leaving the pandemic than going in. Cash profit of £173mn is 74 per cent higher than the same period in 2019. The fact the share price sits around half its 2019 level is rather indicative of the global economic slowdown and Synthomer's increased debt.

FactSet consensus expects earnings to rise to 39p in 2023 which gives a very affordable 2023 PE ratio of five. Earnings aren’t going to race forward, but at these prices there looks to be value here. Buy.

Last IC View: Buy, 266p, 4 Mar 2022