Synthomer - Chemical Reaction - Initiation - Positioning
All,
Please find our new analysis here.
Synthomer continues to struggle to stabilise margins, let alone grow them. Its divisions are focused on Styrene and Butadiene, but create unrelated downstream products. Despite various cost-cutting measures, margins remain weak, and we see much of the latest plans as disappearing into customer price support. The company is targeting a 70/30 split between basic and speciality chemicals, but only the Adhesive business is anywhere close in EBITDA margin terms. There is little risk of a liquidity crunch in the medium term, but we are taking a short position into the late January trading statement.
Investment Rationale:
- We are taking a short position for 5% of NAV. FV of the bonds is 65%. Given ample liquidity, we do not foresee any significant risk of distress in the short term, but the low market equity value underlines the market’s scepticism about the story.
- We see 3 points of downside (to 16%) and 1 point of upside (to 14.5%). The catalyst will be the winter statement at the end of January, followed by the FY results in March.
- We are not convinced that Synthomer will be able to translate cost-cutting into higher margins, as much of its sales are commodity products. We expect EBITDA margins to remain <10% for the group.
- CCS should be able to get margins to 17%, not far from the Speciality margin threshold, but we expect it to take some time, given weak markets.
- Adhesives are now >20% and can be described as Speciality, but HPPS drags overall margins down.
- DCF fair Value is c75% and 65% on a sum of the parts (distressed) basis.
- The bonds already yield 13.5%, so this is not a cheap short.
- The next financial release from the company will be in late January (winter statement); we expect Syntomer to meet its guidance, but the 2026 outlook will be weak.
- Synthomer has made several disposals and moved to right-size its business; it needs to demonstrate that this is strategic rather than death by a thousand cuts.
- Raw Material costs are generally passed through to end users, but energy cost pass-throughs can be delayed.
- Our view would change if we do not see some recovery in EBITDA margins in H1 26.
Key Conclusions:
- Synthomer needs to expand its margins; in the short term, demand weakness is going hamper this. In the longer term, Synthomer needs to up-tier its products to Speciality chemicals with margins >15%. We are sceptical.
- Volumes were weak in H1, whilst we expect management to meet its modest H2 guidance, the 2026 forecast will not point to an improvement, as shown in the Trading comment.
- From our Model section) Our DCF valuation is 75%, and our distressed sum of the parts is 65%. Whilst there are no liquidity issues, we are not convinced operations will turn around soon.
- Liquidity is strong, and there are no significant maturities before December 2028.
- We question the speciality chemical tag as outside of Adhesives, EBITDA margins are well below the 15% normally associated with speciality chemicals.
- In the last 4 years, Synthomer has incurred £175m in cash costs without seeming to improve margins.
- Industry-wise, Synthomer’s competitors are often parts of larger conglomerates with vertical integration benefits.
H1 2025 Trading:
- Revenue -9% (constant currency) £925m vs £1,026m. EBITDA £78m vs £75m (+5%), including £17m in savings. The medium-term target is mid-single digit growth (constant currency).
- Around £10m of the £17m in cost savings was swallowed by lower volumes and price action. This has been a theme in recent “self-help” actions by Synthomer. Cost reductions are disproportionately going to reduce prices.
- £25m - £30m of cost reduction expected in FY 25 => £9m in H2 2025.
- Negative working capital changes (-£71m vs -£46m), required an increase in the use of Receivables financing (£26.8m in H1 25, £114.1m vs £87.3m in the prior period). The company says it will wind down utilisation of the receivables facility as leverage improves.
- The £73m RCF draw was to help finance the £130m maturity of the stub 2025 SUNs.
- Group EBITDA margins of under 10%, point to a base rather than a speciality chemical product base. Management claims 55% of revenue base is Speciality. The medium-term EBITDA target is 15%, which would at least be at the low end of a business with 70% of revenue coming from Speciality chemicals
- 55% Revenue is EMES, 25% US and 20% ASIA
- Outlook for H2 25; Customers remained cautious at the beginning of H2, but there were signs of some improvement. Free Cash Flow is expected to be broadly neutral => c£10m (company definition), Continuing Group EBITDA £143 (flat year on year) => £67m of Continuing EBITDA (company defined in H2)
Divisional Performance
- CCS Revenue £372m (-12%) EBITDA £34.5m (9.35% vs 12%). Volumes -6.5% Px -5.7%. Negative impact from tariff concerns and weakness in the Energy Solutions business. Needs European Construction to improve => H2 25 and H1 26 may still be weak. The slowdown in Energy Solutions demand is leading to further cost reduction plans, including idling and headcount reductions. Also, inventory management measures are being put in place to manage cash flow.
- Adhesive Solutions Revenue £298m (-3.3%) EBITDA £35.4m (11.9% vs 7.1%). Volumes -1.8% on Tariff concerns at clients, pricing +0.4%. US/Chia resilient, but Europe slower. A further £5m of cost savings are expected in 2026. Working capital is expected to be reduced through greater concentration on raw material suppliers.
- HPPM Revenue £254m (-11.2%), EBITDA £16.6m (6.5% vs 4.7%). Volumes -10.2% on oversupply in anticipation of US tariffs, should moderate in H2, price 1.4%. More cost efficiencies expected in H2. After the sale of William Blyth (net consideration of £22m) in H1 25, Synthomer is looking at further disposals in this division, but none are specified.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055