Berenberg upgrades Synthomer to 'buy' on announcement of covenant relief

Analysts at Berenberg upgraded their recommendation for shares of Synthomer from 'hold' to 'buy' on valuation grounds, telling clients that some of the biggest risks were set to ease.

Nonetheless, the trigger for their decision was the announcement on Thursday of covenant relief for the chemicals outfit, whose leverage was expected to reach 3.6 times its earnings before interest, taxes, depreciation and amortisation.

They conceded that a chemicals company trading on a high-teens two-year free cash flow yield "usually" heralded some threat to earnings or financial health.

In the case of Synthomer that risk came from nitrile latex and the downturn in construction and coatings.

Yet in their judgement those were not so much a threat but rather a well-appreciated reality and comparable numbers were expected to become "much easier" in the back half of the year.

"This leaves leverage; we forecast 3.6x net debt/EBITDA in 2022 following the acquisition of Eastman’s resins business earlier in 2022," they said.

"Thursday's announcement of covenant relief removes the main barrier that had prevented us from turning positive on Synthomer."

On their estimates, shares of Synthomer were changing hands on a 2023 price-to-earnings multiple of 6.4, against a long-term average of approximately 10.5.

Hence the upgrade to their recommendation while leaving their target price unchanged at 160.0p.