Synthomer Share Discussion Threads

[al101uk] 16/5/2022 20:08

monty,

Thanks, I was hoping someone would point out the error in my analysis... I didn't expect that it would be quite so comprehensive and game changing for the way I look at every company.

Big Dividend
Director Buy


Got it!

[montyhedge] 16/5/2022 16:28

You're overthinking all you need to know director spent 614,000 pounds on shares in March, another director bought shares two weeks ago, do you think they want to throw money away, plus 21.3p dividend ex div 1st June.

[al101uk] 16/5/2022 16:13

I've given up starting from the bottom and working up to find out how brokers arrived at their numbers and started working from the top down.

I've gone through 2021 results and pulled out each divisions revenue and EBITDA. I also found out the revenue of "Health & Protection" within Performance Elastomers.

We all know NBR is the big question here and that customers are working their way through inventory so aren't buying and that margins have normalised as a restult. The company guides to 2019 levels for the second half of 2022.

The company did £2.3 billion of revenue in 2021, Performance Elastomers accounts for £951 million of that and within that approxinately £529 milion or 23% of Revenue is generated by "Health & Protection" which is effectively NBR.

Normalised EBITDA margins come in at around 15%, so I think it's reasonable to allocate 15% EBITDA to Performance Elastomers ex "Health & Protection". I'm going to assume no growth.

Performance & Elastomer ex NBR comes in at £422 million with £63 million EBITDA

Functional Solutions comes in at £900 million £140 million EBITDA.

Industriual Spoecialities £382 million with £48 million EBITDA.

And the new Adhesive Technologies £866 million and £144 million EBITDA.

That gives us £390 million of EBITDA, but NBR volumes and margins are set to normalise at around 2019 levels for the second hallf and equates to a further £310 million with 48 million of EBITDA (15% margin).

This gives a grand total of £438 million in 2022 vs 2021's £508 million, a reduction of 15%-ish.

There is going to be additional debt costs related to the acquisition (that are not one offs) and some variable costs translating from EBITDA to operating profit, but again I get a drop in operating profit of around 20% for next year... assuming zero growth.

That would equate to a dividend 20% lower than last year at about 24p.

Just as an aside, my calculations show the NBR margins rocketed to around 50% last year, which is where the windfall profits came from.

[montyhedge] 16/5/2022 09:49

Resistance level 300p if broken and holds above 300p then onwards to 325p before ex div 1st June for our massive dividend. That’s my thoughts.

[montyhedge] 16/5/2022 08:06

Eastmans is a dollar earner, pound weak some traders reckon $1.15 to pound, surely that would boost our profits when converted to sterling for our profits. I think run to 325p before June 1st ex div 21.3p, shares fall 21p so still above 300p.Any thoughts on the weak pound.

[al101uk] 15/5/2022 20:19

Synthomer Investor Relations got back to me and confirmed that the dividend policy is 40% of underlying EPS and that is their guidance to brokers.

From Results:

Underlying performance differs from the IFRS measures as it excludes Special Items:

Restructuring and site closure costs;
Sale of a business or significant asset;
Acquisition costs;
Amortisation of acquired intangible assets;
Impairment of non-current assets;
Fair value adjustments in respect of derivative financial instruments where hedge accounting is not applied;
Items of income and expense that are considered material, either by
their size and/or nature;
Tax impact of above items; and
Settlement of prior period tax issues.

Apparently brokers believe that underlying EPS will be the same as IFRS EPS next year. There was a difference of well over £100 million in 2020 and 2021, although it was far lower in 2018 and 2019.

[turvart] 15/5/2022 15:33

al101uk,

I like the way you sorted things out there, cheers.

[al101uk] 15/5/2022 14:00

rogerramjett,

We do know, Synthomer paid an 11x multiple of adjusted EBITDA and they provided further financial metrics in the EGM documents.

My posts:

642 - Explains why at an EBITDA level things shouldn't decline much this year compared to last as the acquisition offsets the maximum one off gain the company achieved last year.

646 - Explains where the big dividend cut forecast comes from and why it may not be correct.

[montyhedge] 15/5/2022 13:27

rogerramjett
You said it we don't know. Directors know the business better than us, thats why I bought, in March, non ex director buys 614,000 pounds worth of stock, ok his probable a millionaire, but still no one wants to throw money away.

[rogerramjett] 15/5/2022 12:24

The problem being we do not know what additional revenue and margin will be produced by new aquisitions of Synthomer. We may get a better glimpse within a quarterly or interim update.

[al101uk] 13/5/2022 16:31

I would imagine Stockopedia take consensus forecasts.

I've asked for clarification from Investor Relations in any case.

[rcturner2] 13/5/2022 16:06

I am using the stockopedia estimates if get more then 17p great.

This is superb value play in any case.

[scrwal] 13/5/2022 15:22

I too have just taken out a small position as a longer term hold. I have assumed an 18p div for the next year which gives me a 6% yield. This is just my finger in the air guess for my future dividend income but hopefully as has been posited the payment may well be in the mid to high 20's which will be a nice bonus if it materialises.

[al101uk] 13/5/2022 00:22

Sorry i've been tying myself in knots here... but finally figured it out...

The company states this about it's dividend payments:

"The Board maintains a dividend policy of 2.5 times earnings cover."

Looking at broker forecasts:

hxxps://research-centre.barclays.co.uk/shares/synthomer/broker-views/

Consensus is for a 20% dip in profits, but a dividend cut that is completely out of proportiion with that numbers, closer to 50%.

This years earnings were 48p and they paid a dividend of 30p. The cover for this year was only 1.6x, not 2.5x

So at consensus earnings of 42.5p and adjusting the dividend to 2.5x we end up with a large cut in dividend.

48 / 1.6 = 30p

42.5 / 2.5 = 17p

The question is, why did the company pay a dividend that does not conform to their dividend policy.

The answer lies in a second statement regarding dividends in the results:

"The total dividend for the year is in line with the Group’s dividend policy with the dividend representing 40% of the underlying earnings per share"

"Underlying" is the key term here. This years underlying EPS is 75.2p and DOES cover this years dividend 2.5x.

75 / 2.5= 30p

The brokers have used the wrong earnings number to calculate the forecast yield. Assuming a 20% fall in underlying earnings per share (which isn't a given by any means) you get a Dividend yield of around 24p.

Underlying could obviously move in either direction in relation to EPS depending on how extrodinary one off costs were last year and how they relate to next results.

I'm reasonably confident that all things being equal any dividend cut will be a relatively a small one.

[turvart] 12/5/2022 21:42

This is from the Annual report.

Growth in gross margin per tonne
reflects increasing specialisation
This long-term growth reflects the fact that
our differentiated portfolio contains many
specialised, high-performance products.
This year, extraordinary demand for Nitrile latex
products during the COVID-19 pandemic meant
that our Nitrile business in particular performed
exceptionally and, even as this demand
softened, in line with our expectations, our
specialised portfolio will continue to benefit
from the underlying market growth trend
that existed before the pandemic.
One of the most pleasing aspects of our
performance has been the consistent growth
in our gross margin per tonne over recent
years, a trend which continued in FY21 and
not just attributable to the impact from the
Nitrile latex business.

Volumes
Performance Elastomers achieved overall
volumes of 844.2ktes in FY21, a reduction
on the exceptional volumes of 896.0ktes in
FY20, and in line with our FY19 performance
of 849.1ktes. Within this overall figure,
volumes in our Nitrile latex business were
lower than in 2020. Nitrile latex performance
was affected by Emergency Movement
Control Orders put in place in Malaysia in
response to the pandemic in Q3, as well
as some customer de-stocking in H2 2021
that followed exceptional demand in FY20
and H1 2021. Our further investment in Nitrile
latex capacity, including JOB6 and our
announced plans for significant further
investment in South East Asia, demonstrate
our long-term commitment to the growing
Nitrile latex market.
We closed our Performance Materials facility
in Oulu, Finland, in February 2021, reducing
SBR capacity by 55ktes in FY21. Our oldest
SBR plant in Marl is closing and a range of
products previously made at this plant are
being successfully transferred across
the wider Synthomer network. This will
significantly improve the utilisation of the
Performance Elastomers Performance
Materials assets in Europe

[rogerramjett] 12/5/2022 21:40

al101uk. Great summary. Thanks for finding the time to post this. Having read the report I had come to a similar conclusion just without the figures. I can see little to no downside possibility but the potential to see a decent increase or growth.

[my retirement fund] 12/5/2022 21:16

Just don't tell Monty.

[al101uk] 12/5/2022 21:09

Seems to be constant discussion around the level of dividend paid and the one off increase in revenues due to Covid booked last year. thought I'd take a look and see if I can made any sense of it all.

The one off growth happened in the Performance Elastomers division. There's no breakdown of the specific Nitrile latex revenue, but lets (for the sake of argument) assume that all growth in that division was one off growth. That's definitely not true, but let's assume that anyway.

Revenue in that division was up by £271 million, EBITDA was up by £91 million and Operating profit was up by £84 million.

Those numbers account for 11% of group revenue, 17% of group EBITDA and 19% of group Operating profit.

The company has stated that all areas of the business grew and some grew against Covid headwinds. It seems unlikely to me that the company will shrink (excluding the one off gains from last year), so the 19% can probably be shrunk somewhat through organic growth.The company make enough noises about future growth in there different divsion to make this a reasonable assumption. Again the entire 19% is not attributable to Nitrile Latex and there is some organic growth in Nitrile Latex in any case as supported by this from the results:

"Putting aside the exceptional demand created by the pandemic, we intend to continue investing in Nitrile latex because we, along with other industry experts, expect the underlying growth in demand for Nitrile latex experienced pre-pandemic to continue."

We also have to look at what the extra cash was used for:

"Looking ahead The exceptional performance in 2021 has enabled the Group to deleverage quickly and has paved the way for the $1 billion acquisition of Eastman’s Adhesive Resins business,"

So what does a $1 billion acquisition bring to the table... well, according to Synthomer "Its portfolio takes us into more specialised, more global and higher growth segments."

More specialised generally means higher margin, but can we find out in monetary terms, what we have bought?

According to Eastmans "The total sale price represents a multiple of 11 times trailing twelve-month adjusted EBITDA of the adhesives resins business."

So lets take the $1 billion and divide by 11 to get a number for EBITDA... that's $90 milion... versus the maximum EBITDA we gained as a one off of £91 million.

In conclusion, debt is likely to have increased, but the business will have grown organically and has bought an additional $90 million of EBITDA while losing a maximum £91 million in one off gains.

I'm not sure what all of this does for the dividend and the business is in a volatile market, but they seem to have more than replaced the lost EBITDA. A dividend cut might still be on the cards, I think they will cut, but the severity of the cut doesn't necasarily have to be as extremne as some here suggest.

[turvart] 12/5/2022 20:36

This is a good read to see how much growth Eastmans will bring.

[rogerramjett] 12/5/2022 20:17

With a statement like this


Whilst macroeconomic conditions remain uncertain, we are encouraged by the underlying trading conditions and a strong Q1 performance with continued margin growth reflecting our ability to successfully manage the inflationary environment.

Accordingly, our full year outlook is unchanged. T he Board remains confident that the benefits of recent acquisitions, continued investment in new capacity and our proven growth strategy will underpin sustainable profit growth in the coming years

I fail to see how a dividend cut is on the cards when the words 'SUSTAINABLE PROFIT GROWTH' are clearly used in the report. Kind of tells you the expectation is, well, for a growth in profit. Isn't dividend payment based on 40% earnings ?????? Why would it be cut ? If anything it could go up. 34p more likely than 17p

[rogerramjett] 12/5/2022 18:47

Wow. Difference of opinion. 17p from 30p for a full year dividend. Basically expecting the earning to halve for this financial year.

Not the way I read the last update. Was a little more positive than that.

34p would be nice. Where would the extra earning come from to make up any reduction in the latex earnings? Assume from the new acquisition. Everything else seems to be just fine and meeting expectations.

[turvart] 12/5/2022 18:13

34p sounds about right yeah.

[rcturner2] 12/5/2022 18:08

Roger the dividend will be about 17p.

[rcturner2] 12/5/2022 18:08

Roger the dividend will be about 17p.

[turvart] 12/5/2022 17:21

roger,

If your looking for Divi then look at GKP also, they are paying virtually every 2 months, they are working on a massive yield. I have them in my portfolio, they are an oil stock.