Gloves come off for Synthomer

Chief executive Calum MacLean largely attributed the Europe and North America division’s £6m fall in underlying profits to £111m (71 per cent of the total) to currency movements and raw material price volatility. This hit orders in the final quarter. A £35m jump in working capital, especially inventory, was attributed to the same issues. Reassuringly, the company says trading has returned to normal in January and February.

It was a very different story in Asia and the rest of the world (ARW) where Synthomer derives the other 29 per cent of its profits. Here, demand is robust, and underlying operating profits rose 30 per cent to £46m on the back of unprecedented nitrile latex volumes. Supported by demographic changes (an ageing population and a growing middle class) demand for nitrile latex, which is used in medical gloves, is very strong and expected to remain so for some time. £45m of last year's record £76m capital expenditure was targeted at adding 90 kilotonnes (kt) of nitrile latex capacity to its Pasir Gudang complex in Malaysia, and plans for a further 60kt should take total capacity to 410kt by 2020.

The company is also focused on product innovation in this area, with the launch of its patented, higher-margin SyNovus latex product, which has been developed closely with customers. The commitment to creating value with new products is underlined by: the establishment of an intellectual property team last year; the submission of a record eight patents; and plans for the opening of an innovation centre in Asia in 2020. Encouragingly, the company has surpassed an annual goal of securing at least 20 per cent of sales from products released within the past five years, aided by a focus on reducing the time it takes to get new products to market.

As well as opportunities in the ARW region, investment is going into the Europe and North American operations - 48 extra kilotonnes for acrylics should be online by summer. Bolt-on acquisitions also remain high on the agenda, although high acquisition multiples mean Synthomer has not done a deal in over a year. Importantly, given the level of investment, the company has clear targets for achieving payback on projects in five years or an internal rate of return (IRR) of 12 per cent. Last year, management's incentive packages had targets added to at least maintaining return on invested capital at 20 per cent, which should help align top brass's interests with creating shareholder value.

While heavy capital spending and the fourth-quarter sales delays mean neither free cash nor operating cash conversion were that impressive in 2018, the working capital movement should reverse and the balance sheet, with year-end net debt of 1.2 times cash profits (Ebitda), looks robust enough to support future spending plans and potential acquisitions. There is also a £133m pension deficit, which required £15m of top-up payments last year.