Solvay’s Businesses Aren’t That Well Positioned, But Market Might Be Too Harsh (OTCMKTS:SLVYY)

Solvay (OTCQX:SVYSF) has significant exposure to consumer durables. Exposure to commercial aerospace is no longer an issue, but in a more stressful credit environment exposure to consumer durables becomes less of an issue. one of them. Meanwhile, some markets are facing long-term tailwinds, with Solvay generally proving very resilient even during COVID-19, with commercial aerospace earnings severely impacted. I was. They plan to split the company, which we think is a waste of time, but so far the comprehensive business has paid a nice dividend. No, but there should be some pressure. It also looks fairly cheap compared to other specialty chemical companies with cyclical end markets. Still, on an absolute basis, we have a low medium-term direction and some of the best direction. A margin segment is also a segment that is likely to decline progressively. However, in connection with the forthcoming first quarter earnings release, he believes the auto industry needs to remain resilient for at least one more quarter before stagnating demand causes problems.

Notes for the fiscal year

Most of the EBITDA growth is due to net pricing initiatives that significantly exceed variable costs. Their abilities have become more valuable.

A recovery in commercial aerospace, as well as sustained demand in markets such as EVs, boosted the materials performance segment, the highest-margin segment. Chemicals performance saw solid demand in the soda ash and derivatives market, which has important industrial uses to maintain ESG standards, while pharmaceuticals also showed acceleration in the fourth quarter, while Coatis The quarter was hit on the construction side, showing massive growth. A turnaround in the construction market compared to a financial year that included early 2022, when there was still plenty of enthusiastic credit. The shift was also seen in the Solution Performance segment, with a significant slowdown in Novecare, one of the company’s larger exposures to construction end markets.

The problem here is that the chemicals performance segment is much more commoditized and the scope of net pricing initiatives is much more limited here. So despite decent sales growth, EBITDA was down 10% organically. The Solutions Performance segment (table above) was more complex due to the slowdown in construction, but we decided to avoid an EBITDA decline of over 11% organically caused by the loss of a major component of this segment’s agro, Aroma, and resources had a good backstop. sale.

In general, the automotive market has been hit by some of the semiconductor slowdowns this year, but there has been a fairly sustained decline in demand for the company, and the automotive industry in general is now benefiting from pent-up demand. is receiving Construction was weak (but below 10%, which isn’t a huge exposure and is mostly in the low-margin segment) Electronics, new weaknesses likely to emerge in certain industrial markets But perhaps the automotive industry once again this constitutes the greatest profit threat.

Outlook

Health care, aerospace, and industrial applications related to environmental protection and exposure to EVs in materials performance are strong. Aerospace, which is generally discretionary due to the cyclical nature of commercial aviation, says travel is undergoing a sharp and idiosyncratic recovery, beginning a post-lockdown recovery while fuel prices are still very high. It can be offset from the facts. Roughly speaking, about 40% of end markets can be considered resilient. Otherwise, the rest of the market, which is more vulnerable to credit cycles, is unfortunately also associated with the highest-margin segments, and will come under renewed pressure as the recession takes hold from tightening credit conditions. There is a possibility. Automotive is included in this number, but we don’t think there will be any pressure in Q1 2023. coverage. Confirming sustained demand in the automotive end market, the results for the fourth quarter were in line with the full year results in terms of organic growth, albeit with some slowdown. was given.

Electronics, which accounts for 7% of the group’s demand and is also included in the more credit-scarred figures, should have already started to taper off if it hadn’t taken a complete hit by now. electronics. Solvay’s fiscal year results or fourth-quarter results still have no definitive indication of a slowdown. but we are pretty confident This builds on other companies in the value chain we’ve researched over the past few months.

Some of the positives are that some segments that are likely to see long-term support are in the commodities segments, which are fairly profitable. Soda and ash derivatives are a good example, but as already mentioned, a key segment in the Performance Materials business saw a severe decline, significantly impacting his EBITDA contribution, primarily related to automotive. There is a possibility. this in the past Overall, the functional materials segment of automotive chemical companies has seen the most severe decline during COVID-19 and is the area with the most volatile demand, but its expertise has the greatest pricing power and profits. even though it’s bringing in the rate. Electronics is another area that could see weakness as semi-finished goods become oversupplied and consumer discretionary spending is squeezed. Again, these segments are relatively prominent in the higher margin materials segment. Sadly, construction, already under obvious pressure, is also a major margin contributor within the chemicals performance segment.

Conclusion

Solvay’s valuation is relatively attractive when compared to other European companies with major cyclical exposures within the high-margin chemicals segment. Arkema (OTCPK:ARKAY) is trading at a premium multiple of almost 20% to Solvay, despite its heavy construction exposure, which should remain a weak end market. Arkema has more exposure to construction, but instead has similar exposure to consumers and electronics, which should result in oversupply of semiconductors and electronics, making it a more vulnerable segment. The bottom line is that we share an end market that will see similar credit-related declines in the next cycle. Autos are ultimately still subject to a declining credit cycle, but they will be more resilient than construction for at least another quarter or two. Compared to BASF (OTCQX:BASFY), which has a similar end-market mix but much more exposure to commodities, Solvay’s multiple is almost half, the same as Evonik (OTCPK:EVKIF), and Evonik ( OTCPK:EVKIF). – Market composition to Solvay (roughly speaking) and WC requirements and other metrics. However, Solvay points very badly due to the mixed effect that comes with decelerating the car. This could be expected starting a few quarters from now, assuming the credit crunch propagates through the economy-wide multiplier effect for some time.

While the 4% dividend is reasonable and the relative case for Solvay willing to buy cyclical stocks during a recession is pretty good, we still believe there are worse times ahead for the company, and the can be multiples of 6. It is found in firms with much lower uncertainty.

Also, I don’t think the separation plan is We provide all kinds of catalystsIn our opinion, the market is accustomed to parsing a profile like Solvay’s and when almost every other chemical company has an intermediates segment, it makes the business more commercialized with less pricing power. There is no need to separate businesses with high pricing power and high professional exposure. Or a clearly indicated and defined basic chemical operation. Ultimately, it’s the chemical business that ends up in EssentialCo or the commercialized business, but most others end up in SpecialtyCo. This actually makes the business potentially subject to lower EBITDA as the credit environment changes further. sour.

The company has better times, and hopefully we’ll wait until we’re closer to the bottom of the cycle. forget the bottle, although there are possible value cases. Passed for the time being.

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