Synthomer storms ahead

Specialty chemicals company Synthomer (SYNT) delivered a barn-storming half-year performance as unprecedented demand for nitrile products, due to the need for PPE from healthcare providers in all its major markets, along with relatively little operational disruption, powered its profits. The only downside was that the company didn’t quite manage to report its numbers without booking ongoing impairment charges of £22.5m. 

In many ways, Synthomer was fortunate in that it was designated an essential industry very early on in the pandemic and consequently could run its 36 production sites without interruption. This meant its performance elastomers segment, which produces nitrile latex, nearly quadrupled its cash profits contribution with its natural operational gearing going into overdrive. The company had to deal with far higher raw materials prices in the half, which meant more cash tied up in working capital, but the proportion of working capital in relation to total sales stayed constant at 10 per cent - with the forecast that materials prices will fall as the year progresses.

Management predicts that demand will return to normal early in the third quarter as the pandemic gradually subsides, though it kept its forecast for £500m of cash profits for the year unchanged.

Synthomer delivered a truly impressive performance in the half and even the outlook for impairments looks stable, which is important given the £839m of intangibles that currently sit on the balance sheet. With free cash flow yield of 4 per cent and a PEG ratio (price to earnings growth) now below 0.5, Synthomer has a quality latex sheen when compared with its industrial peers and this deserves recognition. Buy.

Last IC view: Hold, 308p, 7 Aug 2020