Synthomer shares at decade low as medical equipment demand slows

The chemicals manufacturer anticipates that destocking of its medical glove inventory will take at least until the end of 2023. Meanwhile, adverse economic conditions have pushed the Synthomer share price to its lowest level in over a decade.

The Synthomer [SYNT.L] share price has lost more than three quarters of its value in 2022, falling 75.35% to close 12 October at 88.85p. The decline marks the lowest price the shares have traded at in over a decade, following the aftermath of the financial crisis of 2008 and 2009.

The chemicals producer, which operates across a wide range of industries including health and protection as well as construction, was buoyed over the past two years by increased demand amid the Covid-19 pandemic for its medical gloves. However, the pandemic’s decline has coincided with an unfavourable macroeconomic climate which has slashed demand for Synthomer’s industrial products.

The iShares MSCI UK Small Cap ETF [CUKS.L] has fallen 32.2% year-to-date, reflecting the struggles that have impacted most British small cap stocks so far this year. However, Synthomer’s significant underperformance compared to the fund reflects the severity of its exposure to difficult economic conditions. As of 13 October, the fund has a 0.13% weighting in Synthomer.

Gloves in over-supply

In a statement on 29 September, Synthomer lowered its full-year EBITDA expectations by 10% to 15% as a result of destocking medical gloves and falling demand.

While the excess demand for medical gloves that flared during the pandemic has abated since mandates to wear them have largely been lifted, Synthomer’s inventory is so high that destocking isn’t expected to complete before the end of 2023. According to the company, this has had a significant impact on its nitrile butadiene rubber (NBR) output.

The statement also warned that unfavourable macroeconomic conditions had prompted a decline in demand for construction and coatings end markets. Synthomer promised to provide an update to investors and analysts at an event on 12 October.

The situation is grim for Synthomer, which has a banking covenant stating that its debt can be no greater than 3.5 times its earnings. Jefferies analysts reportedly expect the firm to speak to lenders about a potential breach.

Earnings pull back

Profitability was already a problem for Synthomer before it issued the trading update. Its interim results, published on 2 August, reported a 46.4% year-over-year fall in earnings in the six months to 30 June 2022. Earnings as a percentage of revenue for the period was less than half that, at 13%, of the corresponding figure for 2021 (26.2%).

The bulk of the decline reflected the 81.3% fall in Performance Elastomers earnings, which had boomed during the pandemic. All other divisions delivered earnings growth during the period.

Earnings per share plummeted from 49.3p to 19p, but despite this the company issued a dividend of 4.0p (down from 8.7p in H1 2021).

Chief Executive Officer Michael Willome compared the results favourably to those the business experienced before the pandemic. “These results demonstrate the solid performance of the business compared to pre-pandemic levels,” he said, “with EBITDA significantly ahead of 2020 and 2019 and good levels of organic profit growth.

“All parts of the business except NBR generated EBITDA growth against a strong H1 2021 comparator.”

Analyst rate Synthomer ‘hold’

On 6 October, Numis analysts cut their price target for Synthomer to 120p, from 230p. The stock’s rating was downgraded from ‘Add’ to ‘Hold’.

Among 14 analysts polled by the Financial Times, majority give Synthomer a ‘hold’ consensus rating, with 10 giving the stock this rating. The other four were split evenly between ‘buy’ and ‘outperform’.

Among 14 analysts offering 12-month price targets to the Financial Times for the stock, the median target was 265p, which implies 198.3% growth from the 12 October close of 88.85p.

This optimistic forecast could be reflecting the view that, in the long term, Synthomer is in good shape. The most pessimistic target of 120p sees the stock gaining 35% over the next 12 months, while the high target of 460p sees the stock gaining 417.7% over the coming year.