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More Analysis of Covestro Results

Germany’s Covestro Q3 net profit up 62%, sales flat

25 October 2016 11:36 Source:ICIS News

Covestro HQ at Leverkusen (source: Covestro)(adds financials, analyst’s comment from paragraph 7)

LONDON (ICIS)–Covestro’s third-quarter net profit surged by 61.9% year on year to €259m amid higher margins, the German producer said on Tuesday.

Sales for the three months to September 2016 were flat at €3bn, after declines in the first two quarters, the company said in a statement.

Earnings before interest, tax, depreciation and amortisation (EBITDA) were up 26.2% at €574m, with operating profit (EBIT) up 41.5% at €406m.

Operating profit in Covestro’s polyurethanes (PU) division more than doubled to €168m in the third quarter from €60m in the same period of last year.

The polycarbonates (PC) unit posted a 14.2% year on year rise in operating profit to €145m in Q3, while the coatings, adhesives and specialties segment reported a 0.9% increase at €114m.

For the first nine months of this year, the company’s net profit surged by 57.1% year on year to €671m.

Covestro’s pricing power continued to be dented in Q3, with a fall of 5.1% in overall selling prices, although this figure was an improvement on the previous year’s 7.4% decline.

By division – and despite booming operating profits posted during the quarter – Covestro’s pricing power continued to fall, albeit less than in 2015.

Third-quarter PUprices were 6.2% lower than in the same quarter of 2015, when they fell 12.1%.

On the other hand, the PC division posted a 5% fall in selling prices during the July-September quarter, and this followed a 0.8% decline during Q3 2015.

Covestro’s coatings, adhesives and specialties division – which posted flat operating profit at €114m – also struggled with selling prices, which fell 2.7% during the quarter, deepening the 1.4% decrease seen in Q3 2015.

The German investment bank Baader Bank said Q3 demand for PU and PC had been better-than-expected but the positive Q3 figures would not change its “cautious” valuation of the company’s stock.

“After Covestro experienced strong tailwinds in 2016 by lower raw material costs and the delayed start-ups of competitor capacities, raw material costs are rising significantly since mid of 2016 and the delayed capacity additions are finally coming and, consequently, we expect that Covestro might see pricing power headwinds in 2017,” said Baader’s chemical analyst Markus Mayer.

In September, Mayer and other analysts warned that the good fortune experienced by the company’s share price would come to an end when the tailwinds started to fade. Covestro’s share price has doubled since its listing in October 2015, and it would be advisable for Bayer to divest its remaining stake in the company, they added.

Investors have not been impressed by Covestro’s results either. By 10:30 London time, its stock was trading 1.4% lower than the previous close at €52.62.

Baader’s Mayer has kept his outlook for the stock ‘unchanged’, with a 12-month share price target forecast of €35 and a recommendation to ‘sell‘.

Additional reporting by Celine Poon

Image source: Covestro

By Jonathan Lopez