a UK-based chemicals maker that makes latex for medical gloves, has excelled during the pandemic as demand for personal protective equipment has skyrocketed.
Shares of the UK-listed company (ticker: SYNT.UK) have jumped more than 70% in the past 12 months, far ahead of the gains of German rival BASF, up 22%, and based UK.
Gains may well continue, with Synthomer poised to capture much more market share. The Essex-based company, with a market value of £ 2.29 billion ($ 3.14 billion), operates in 21 countries. In addition to latex, it manufactures products such as adhesives for flooring and materials used in paint, packing tape and mattress foam. But latex has been the big driver of growth.
Demand for gloves, masks and protective gowns continued to exceed supply in the first half of 2021. Prices increased, helping Synthomer earnings before interest, taxes, depreciation and amortization, or Ebidta, to more than tripling to reach £ 323million. The good results were also helped by better profit margins for nitrile latex, a material used for PPE.
Sebastian Bray, analyst at broker Berenberg, estimates that this represented more than half of Synthomer’s profits for the first half of 2021, with reported profits more than quadrupling in the same period from the previous year.
Even with vaccination campaigns now mitigating the impact of the pandemic, Covid-19 will not go away. The global market for raw materials for gloves and PPE, including natural rubber and latex, represents around five million tonnes per year worldwide; Synthomer only produces 440,000 tonnes.
The company will increase its capacity, producing an additional 200,000 tonnes per year by 2024, Bray said. But even then, it will only control around 4% of the total market, so there is a lot of business to be gained.
Jolyon Wellington, analyst at brokerage Peel Hunt, estimates that a production increase of 200,000 tonnes will increase EBITDA by £ 53million, bringing Synthomer’s total profit to £ 428million by 2025, from £ 259million in 2020. He believes that could increase shares by 30% to £ 7.
At a recent price of £ 5.40, the stock is hitting a low multiple of 9.2 times this year’s expected earnings, a good 60% discount from its peers.
The dynamics of the latex market are clearly helping stocks. “[The] The nitrile latex market is exhausted, ”says Jaroslaw Pominkiewicz, analyst at Jefferies. “Although several nitrile latex expansions are expected to be completed in the coming years, we expect the additional volumes to be absorbed easily. The only downside is that profit margins are unlikely to stay that high, as competitors are ramping up production as well.
Caroline Johnstone, the president of the company, said Barron in a press release: “Synthomer has a proven strategy and a solid balance sheet, which reinforce our confidence in our ability to continue the excellent momentum of the group and to generate long-term growth and solid returns for our shareholders.
The company also has good prospects in its other divisions. Its building products, such as waterproofing, could benefit from increased urbanization, while the materials it manufactures to keep diapers dry could see greater demand from the aging population.
Synthomer is also expanding through acquisitions. It bought out its American rival Omnova Solutions in 2020 and has a substantial war chest. Pominkiewicz, for his part, is looking for a “transformational acquisition” later this year.
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