Many moving parts leave the guidance unchanged

The management fully confirmed the FY guidance despite the fact that it was reached after nine months. In the call the management flagged some uncertainties which overhang the performance in the Q4. As destocking seems to be becoming the common denominator in the chemicals industry, we understand why companies are opting for caution. Sales (+6.2%) and adjusted EBITDA (+4.4%) were a clear beat to consensus. The FY consensus currently stands at €2,093m very close to the company’s guidance.

Guiding to the next mountaintop

Arkema is now much more fun to cover after a long period of high cyclicality and poor results. For the moment all this is behind us and the management is currently basking in the results of all its hard work. Thing could change rapidly however. Q2 was another consensus-beating quarter (sales: +22.9%; EBITDA: +16.0%), giving the management enough headroom to again raise its guidance after the most recent upgrade in Q1.

Taking full advantage

Arkema is ‘sailing’ ahead of the cost curve. In our view, this was the main reason for the management to raise the bar. In the call, the management shed some light on the Q2, expecting strong growth at EBITDA level. We are struggling a bit with the low consensus as the beat was substantial (+7.7% to sales, +42.6% to adjusted EBITDA and +52.2% to adjusted EPS). Other companies would have released preliminary figures.

After a strong catch-up follows a smaller step up

The headline does not imply that Arkema is taking a nap, but another record race should not be expected and the step up is an inorganic one. The 2021 figures were a beat to consensus (sales: +4.2%; adjusted EBITDA: +6.0%). Against the background of the war in Ukraine, we became less optimistic than management.

Passing on higher raw material costs

Arkema was in a position to implement (strong) price increases even in businesses where the company had a ‘tradition’ of suffering from higher raw material prices. We believe availability was also a strong argument. Interestingly, Adhesive Solutions did not benefit as strongly as the other divisions. Q3 figures were above our cautious expectations and beat consensus expectations by +16.4% (top line) and +13.9% (EBITDA).

Next building block …

… to become a speciality chemicals company by 2024, by acquiring something pharma-like. Basically, Arkema plans to acquire the US-based adhesive platforms corralled together at Ashland’s Performance Adhesives business. The charm of the acquisition is that the acquired technologies will be globally rolled out, giving Arkema’s portfolio a broader stance. Management is quite optimistic it can generate substantial synergies including some positive tax effects, which should make the high valuation a

NWC inflows despite strong growth

Arkema surfs the chemicals wave well, being carried along by the strong recovery. Supply availability is one side of the coin. On the other, stands cash collection and the company was good at this. Business-wise, the paved path seems to be a well-chosen one. We appreciate the guidance increase, but do not understand that it is based on an unchanged scope after the closing the PMMA divestment. Consensus was beaten by +5.7% (top line) and +21% (adjusted EBITDA).

Close to pre-crisis levels

The top line has already matched the Q1 19 level, but profitability could not fully catch up, despite the optimised business structure, which might be related to the strongly rising raw material prices. Additionally, management managed the organic momentum of the growth well as NWC outflow remained quite stable. Management has become more optimistic after the clear beat in its Q1 guidance. Figures were slightly above our expectations and beat street estimates.

Closer to the 2024 target

Arkema’s increasing footprint in speciality chemicals helped to protect profitability. Furthermore, management has taken the next steps towards the mid-term target, even in a crisis. By divesting PMMA, its has taken advantage of a special situation, allowing for a decent valuation. Unfortunately, the company still fully consolidates the to-be-divested business showing up our estimates. Consensus was clearly beaten as it still included the PMMA business.

FCF upswing in uncertain times

Like other chemicals companies, Arkema had to manoeuvre in challenging times, but the adhesives business was an anchor with its quite resilient business. The other divisions were in rough seas, as expected, giving a mixed picture from a variety of impacts. Intermediates was negatively affected by all factors. The newly-provided guidance looks like a strong commitment. The Q3 figures were a notch stronger than expected, but matched well with the street’s expectations.

A helping divestment

Like other chemicals, Arkema could not escape from the developments in the customer markets. Nevertheless, the speciality side of the company did quite well despite some meaningful declines in volumes, whereas Intermediates was hit by lower volumes and lower prices. All divisions saw a strong drop in profitability. The divestment proceeds of Functional Polyolefines were a tonic and helped profitability to beat our expectations. Consensus was also beaten.

Lower demand and prices took their toll

Arkema’s business model is still a chemicals one, even though the specialities’ share has increased in the recent past. Interestingly, management’s strategy to focus on adhesives seems to be paying off. In addition to the spreading virus, the country, where Arkema has its headquarters, also had an adverse impact on profitability. Q1 came in a notch weaker than we expected. Consensus was perfectly met.

Higher-margin business model pays off in 2019

Arkema reported a better than expected set of figures (consensus was perfectly met on the profitability level). The portfolio changes in recent years have made the company’s financial mechanics more resilient to economic downturns. Despite all current uncertainties, management seems to be quite optimistic for 2020 – at first sight. But it has excluded any virus-triggered effects, which are estimated to be around €20m by the end of February.

Non-operating drivers

The good point is that the EBITDA margin has not faded away as Arkema’s top-line was driven by an acquisition and FX tailwinds. However, lower raw material prices put some pressure on it. Volumes developed positively in most divisions. Reported figures beat our expectations, but were below consensus. For Q4, we remain cautious.

Resilient margin, despite a mixed picture

At Group level, given the tough environment, Arkema’s results proved fairly resilient. After the company’s ‘overhaul’ in recent years and the increase in the proportion of specialties’ sales (to 71%), no one would have expected Coatings Solutions to report higher profitability. Despite confirming FY guidance, management indicated some weakness in H2. The figures did not fully meet our expectations (profitability undershoot), but consensus was beaten.

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Hybridan Small Cap Feast - 17 Jan 23

17 January 2023 @HybridanLLP Status of this Note and Disclaimer This document has been issued to you by Hybridan LLP for information purposes only and should not be construed in any circumstances as an offer to sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This document has no regard for the specific investment object