Synthomer's third quarter progress fails to impress as latex outlook blurs

Synthomer confirmed strong progress across most of the chemicals group's operations in the third-quarter, although the market's reaction seemed to focus on weakness in its paper business and an uncertain latex outlook.

Management remained confident in hitting their full-year targets, as while volumes in Europe and North America were down on the paper softness, the Construction & Coatings and Functional Polymers segments were seeing further improvement.

Synthomer said the recent falls in raw material prices had helped it generate a “modest” improvement in unit margins since the second quarter and over the comparable period in 2014.

Asia and Rest of World segments continued to perform strongly in the third quarter, with both volumes and unit margins higher than the preceding quarter and the 2014 comparative.

“This ongoing momentum reflects a further rise in volumes and unit margins in our Nitrile business,” the FTSE 250 company said of its latex-making business.

As its main revenue streams and raw material costs in Asia are US dollar denominated, the recent volatility in the Malaysian ringgit has had little effect on the reported operating profit in sterling.

Looking forward, management expect to maintain net volumes and margins next year even though it and its rival nitrile producers plans to increase capacity during the second half of 2016 and early 2017.

“Whilst we are confident of continued growth in the market and strong demand going into next year, we expect this planned capacity increase to impact the supply/ demand balance during the second half of 2016 leading to similar net volumes and margins to 2015 for the year as a whole.”

Cash generation remained strong at £26m during the quarter, partially offsetting the £42.8m outflow for the final ordinary and special dividend payments made during the quarter.

Analyst Paul Satchell at Investec said the trading statement showed a "continuation of the excellent performance" seen in the first half of the year and was generally impressed.

N+1Singer said they considered its “a positive update against a weaker macro and sector trading environment”.

But they admitted guidance of a consistent performance for both divisions in for the 2016 financial year “slightly dampens expectations” in that year, with consensus forecasts currently pointing to 7% growth in profit before tax.

Singer added that interest in the shares remained over the potential for further special dividend payments and, in time, M&A under the new management team.