12th Jan 2024 08:16
(Alliance News) - Synthomer PLC's chunky leverage has not put investors "at ease", though German bank Berenberg said that while debt is high, the firm's liquidity is too.
Berenberg rates the chemicals manufacturer at 'buy' with a 320 pence price target. The stock has fallen 86% over the past 12 months and closed at 150.30p on Thursday.
"Cyclical stocks with high indebtedness do not put investors at ease. The more than 80% decline in the share price of Synthomer in the last 12 months is a case in point. We are more optimistic," analysts at the German bank said. "The firm has a leverage problem, although not a liquidity issue."
The firm's GBP276 million fundraise last year bought it some "time to recover", Berenberg believes.
Synthomer has customers in the coatings, construction, adhesives, and healthcare markets.
Berenberg said weakness in the construction sector caps Synthomer's recovery potential for now, but if things get better, the shares can mount a recovery.
"Construction market headwinds mean that the company will, in our view, show minimal progress in organically cutting its absolute net debt pile, even allowing for self-help. The moment a cyclical recovery, fast or slow, materialises, however, shares should jump – perhaps as drastically as they have fallen," it added.
An earnings bounce might take time, but the firm has "the cash to wait, and offers much more upside than most other cyclicals".
Promisingly, some indicators are showing chemicals demand in China has improved recently, Berenberg said, while a tracker in the eurozone has "bottomed out".
"A full recovery in chemicals volumes, although initially unsteady, should accelerate in H2. Prices for nitrile latex have stabilised over the last few months," it added.
Synthomer reports a trading statement on January 30. Berenberg expects some cuts to an already "stale" earnings consensus to follow.
By Eric Cunha, Alliance News news editor
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