Share tips: This polymer producer's a steal
By
Paul Hill Dec 23, 2011
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When a company loses over a third of its market capitalisation, there’s usually a good reason for it. But this isn’t the case with Yule Catto, a maker of the speciality polymers that go into adhesives, lacquers and paints. In May the board confidently stated that results were on track to meet full-year targets. By August that outlook had improved to “modestly ahead”, and this encouraging picture was repeated in November. Yet the share price is languishing just off its 12-month lows. To me, the stock now looks a steal.
In March, Yule completed the transformational purchase of its rival, PolymerLatex, for £388m. This effectively doubled the size of the group, widened its geographical reach and further beefed up its strong defensive positions. Demand for the majority of its products is cyclical. But it is also the number-one player (with a 40% market share) in nitrile butadiene rubber (NBR) latex.
That segment of the business is growing at 10%-15% a year as the healthcare industry adopts NBR in its sterile gloves and moves away from natural rubber, which can provoke allergic reactions. Chief executive Adrian Whitfield reckons Yule can grow its top line by 3.9% a year until 2015 and lift profit margins too, as £20m of synergies from the PolymerLatex deal flow to the bottom line.
Also, assuming that political turbulence in the Middle East calms down, there’s a chance that oil prices may also soften. That should lead to a big boost in earnings since petrochemicals represent a large portion of the cost base. Whitfield says that “the PolymerLatex acquisition… marks the final step in a long process of transforming Yule Catto into a highly focused speciality polymer business”.
Yule Catto (LSE: YULC), rated a BUY by Collins Stewart
Earlier this month Yule offloaded its non-core pharma business to Vivimed for £35m. Here profitability had slipped due to competition from cheaper generic rivals emerging from India and China. The proceeds from the sale will be used to reduce Yule’s borrowings, which stood at £240.5m (or less than two times EBITDA) in June. The firm also enjoys substantial exposure to emerging markets, which represent around 40% of revenues.
The City is forecasting turnover and earnings per share (EPS) of £1.2bn and 19.2p respectively, rising to £1.3bn and 23.3p in 2012. I rate the stock on a ten-times through-cycle EBITA multiple. Adjusting for the £92m pension deficit delivers an intrinsic worth of 200p a share. Given the depressed valuation, there is even an outside chance that a large predator, such as American giant Dow Chemicals, could launch a bid.
On the downside, there are risks associated with integrating its acquisition, and investors also need to monitor foreign currency and raw material price movements. Nonetheless, with top positions in many of its chosen specialities, Yule Catto looks far too cheap on a p/e of less than 8.5. Broker Collins Stewart has a target price of 294p a share, and preliminary results are scheduled for 14 March.
Rating: BUY at 155p
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