Disposal finally slashes debt at Elementis

An outsized debt pile has loomed large over specialty chemicals group Elementis (ELM) – and its share price – for the last few years. 

Admittedly, it made some headway in shrinking the figure – to $367mn (£206mn) from $401mn – through 2022. However, the real strides have been made this year – with the sale of its Chromium business completing successfully in January. Cash proceeds of $119mn will go towards debt reduction. 

Chief executive Paul Waterman said the disposal enhances the quality of the group’s portfolio by “reducing the volatility of our earnings, improving margins, and transforming the sustainability profile of our business”. 

In its full-year results, Elementis reported that revenue from its continuing operations was $736mn, up from $709mn in 2021.  With revenue of $389mn, Coatings was the group’s best-performing division last year, while sales growth in its Talc business remained broadly flat at $136mn due to weak demand.

Elementis’ Personal Care division is an undoubted strength, with revenue up 21 per cent on a reported basis. The company attributed this performance to a return to more normal patterns of consumption as Covid-19 restrictions were lifted in many of its end markets.  

Management expects cash generation to improve in the second half of the current financial year on even stronger consumer demand. It also said it remains confident of the delivery of its medium-term target of a 17 per cent operating margin.

According to FactSet broker consensus, Elementis currently trades on 13.2 times forward earnings for 2023 – a sure sign that the shares have bounced back from rock bottom. But we still don’t know if a substantial re-rating is on the cards just yet. We upgrade to hold.

Last IC View: Sell, 117p, 2 August 2022