Elementis slides on Berenberg downgrade

Shares in specialty chemicals firm Elementis slid on Friday as Berenberg downgraded its stance on the stock to ‘hold’ from ‘buy’ and cut the price target to 220p from 258p.

The bank noted that since it upgraded the stock at the end of October last year, Elementis has outperformed the Stoxx Europe 600 Chemicals index by around 12%, re-rating around 1.5x turns on a 12-month forward price-to-earnings basis to just over 16.5x.

Berenberg cited dividend support and an apparent stabilisation in oilfield volumes as reasons for the outperformance.

However, with the valuation looking full and additional headwinds in chromium left, Berenberg has turned more cautious.

It argued that consensus estimates have underestimated the scale of the potential reduction in pricing and margins within Elementis’ chromium division.

“We think Elementis will continue to lose market share in Europe and Asia-Pacific to FX-advantaged players such as Kazchrome and Russian Chrome, which appear to still have some spare capacity.

“Structural advantages in the US market (c60% of the division’s sales) appear safe for the time being. But short term, pressure on chromium chemical prices (down c7% in 2015) will weigh on chromium sales (-2.4% for 2016E) and adjusted EBIT, where we a see a further 1.5% reduction versus 2015, to 22.5%.”

Longer term, it reckoned Elementis will have to avoid pricing increases in the US to deter foreign entrants, meaning lower chromium margins could become structural.

At 1528 BST, Elementis shares were down 7.8% to 220p.