Synthomer plc - Trigger - Model update - Positioning
All,
Please find our updated analysis here.
Despite the banks being given security ahead of the SUNs, relief at the loan extension to February 2029 and covenant relief has pushed the bonds to the mid-70s, so we are taking our short off. The speed and extent of the rebound caught us by surprise. Further improvements will be slow, but we will continue to observe progress. Operationally, 2025 was as poor as expected, but there are signs of life in the first quarter of 2026. The conflict in the Gulf is disrupting supply chains for some competitors, but we still see Synthomer as too small and expect it to be bought eventually.
Investment Rationale:
- We are taking off our short position in the Synthomer SUNs, which has worked for us but not as well as if we had taken the short off immediately after the results. The reaction to the LME transaction from SUN holders has been outweighed by the relief at the debt extension. We sold at 81% in January 2026 and will close the position out at 76%. Our return is around 3% over the three months (5 points of capital less 2.75 points of coupon).
- With ample liquidity and looser covenants, we do not foresee any liquidity problem.
- The conflict in the Gulf will support Synthomer in H1, but we are still sceptical about the value of the business given its scale.
- We see three points of downside (to 63%) and 5 of upside over the next 6 months.
- We see fair value in the bonds in the 80’s, but this would take a bid for the company, and we are not anticipating this as likely in the next 12 months.
- We are not convinced that Synthomer will be able to translate cost-cutting into higher margins, as much of its sales are commodity products.
- 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.
- After the drop-down transaction, DCF fair Value is c81% and 71% 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 September.
- 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 Volumes and EBITDA margins in H1 26.
Key Conclusions:
- Synthomer needs to expand its margins; in the short term, demand weakness is going to 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 65%, and our distressed sum-of-the-parts is 86%; the difference is the persistent Special Items reflected in the Consolidated EBITDA vs the Divisional figures.
- Post the LME operation and the UKEF/RCF extensions, there are no liquidity issues.
- 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.
Recent Trading:
- 2H25
Results were as weak as expected, but the impact of the Gulf War on Asian peers will support 2026 results. Synthomer extended its bank debt to 2029 (still maturing ahead of the SUNs). The maturity extension was made in return for security over the company’s US assets. The LME transaction represents about 25% of Revenue and a slightly higher proportion of EBITDA (according to management).
Revenue was down 10% to £1,739m, EBITDA was £143m (reported); management delivered £30m of savings (£13m in H2) and is expecting a further £25m in 2026. Free Cash flow was breakeven, excluding the £50m receivable purchase from the main shareholder in December.
The £310m RCF has now been fully repaid (£73m drawn in H1) and extended to February 2029 along with the UKEF loans. Synthomer also extended its Receivables facility (£200m, £100m drawn) until July 2027. With £190m of cash and £350m of liquidity (the £50m Receivable facility from the parent has already been unwound). Synthomer is well placed to weather the rest of the year.
Despite improving momentum in Q1 and the expectation of volume and margin improvement in Q2, Synthomer is not increasing its 2026 expectations. Right now, Synthomer is benefiting from demand driven by disruption to peers (Synthomer operates a manufacturing in-region strategy). The disruption to Gulf supplies is likely to persist for 6 months after hostilities stop. We expect a relatively quick resolution to the Gulf situation. We do not expect that customers will alter their buying strategies once the Gulf conflict ends. However, Synthomer should have a better than feared 2026 and should benefit from an improving macroeconomic environment in 2027/2028.
- Divisional Performance.
CCS – Revenue £699m (-11.5%), on volumes down 6.8%. H2 performance didn’t recover the ground lost in H1, but didn’t get any worse. Energy Solutions was impacted by destocking, which hurt both revenue and margins. EBITDA was down 25% (-35% in H1). The company delivered £13m of savings in H2 (annualised), which helped EBITDA. Management hopes to benefit from improved European construction in FY26.
Adhesive Solutions – Revenue was down 3% (H1 -3%) on lower volumes. FY EBITDA rose to £66m (+38%), even without the £11m in cost savings; the increase was 15%. US volumes were flat, and Europe was slower. Base chemicals are seeing a lot more competition from China, but Asia delivered the most growth.
HPPM – Revenue £469m, volumes didn’t improve in H2 (-10%), with Nitrile Gloves down 17%. There were oversupply issues due to pore-ordering before the introduction of US tariffs. EBITDA fell 26% to £24.2m, deteriorating in H2. We still see the Nitrile Gloves business as one that Synthomer should be selling.
LME Operation secures liquidity:
- The LME reduces the potential recovery for SUN’s holders from 86% to 77% using the DCF model.
- The impact is not terrible, but it puts the banks firmly in control of any restructuring discussions.
Terms:
- Extends maturity to Feb-2029, still prior to the May-2029 maturity of the SUNs.
- The loans also have security over the US business, which represents around 25% of Revenue (it will be more in terms of EBITDA, as US margins are generally higher). We assume 33%
- There is a quarterly leverage and minimum liquidity test; the company declined to give the liquidity level and only gives the annual leverage test.
- The banks have a 1.25% exit fee, which is worth £9.5m, at a share price of £1.10, the banks would be in the money converting to shares at £0.37.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055