Elementis in need of a makeover

The group's ‘personal care’ division is largely weighted to cosmetics, sales of which have dropped because of Covid-19. Elementis bolstered the skincare side of the market in 2018, identified – along with mascara – by management consultant McKinsey as a growth area in the Covid-19 recovery. Yet this year looks difficult, despite the growth potential. A report from McKinsey also says that up to 85 per cent of cosmetics sales are made in-store; the growth of online sales won't make up the difference. 

True, a sales mix such as at Elementis is familiar in the speciality chemicals business. But Elementis has to run on lower profit margins than, say, Croda International (CRDA), whose shares we looked at in May as a potential buy. 

Elementis's largest division by sales is coatings, which chiefly sells to carmakers, the construction industry, and manufacturers of sealant and adhesives. Coatings’ sales and operating profit fell 8 per cent between 2018 and 2019 to $320m and $48m, respectively. However, its operating margin did grow – to 15.1 per cent – but this is about average for the group; its personal care division had an operating margin of 21.9 per cent in 2019, while chromium – an important but smaller area for the Elementis – fell 7.3 percentage points to 10.6 per cent.  

Operating margins are important since they offer protection against a forecast drop in sales this year. Elementis said in April it had seen a 15 per cent top line decline. Outside the main three divisions, oil and gas division is under pressure and Elementis was forecasting a “challenging” year for chromium before Covid-19 hit, so these will be of limited help to 2020's profits.  

Elementis has to balance its earnings and its net debt because its lenders set a limit of 3.75 times net debt to 'Ebitda' (essentially cash profits). The most recent update the company gave on this put that ratio at 2.7 times on 31 December, with net debt at $454m before lease liabilities. Broker Berenberg sees the ratio creeping up and ending 2020 at 3.4 times, although lenders could loosen the covenant if it gets tight. 

There are certainly positives to Elementis’s portfolio, with powerful market positions in chromium and especially hectorite, a greasy clay with widespread uses. True, there was consternation in 2018 when management wanted to spend $600m on the Mondo Minerals talc operation to complement its California hectorite mine. But the Mondo deal could be the right call if the move to more ‘natural’ products continues.