The Urethane Blog

Covestro Posts Strong Quarter

Covestro says it’s raking in cash faster than expected

* Sees free cash flow target within three years, not five

* Plans to increase spending on plants and gear

* Q4 EBITDA doubles to 879 mln euros, above consensus

* Will likely renew share buyback permit at 2019 AGM

* 2018 EBITDA seen flat

* Shares rise 2.7 pct to top of sector index (Adds shares, share buybacks, analyst quote, background on economy)

FRANKFURT, Feb 20 (Reuters) – Germany’s Covestro, a maker of materials for insulation foams and transparent plastics, is generating cash faster than previously thought, helped by buoyant demand for materials that the chemicals industry is struggling to meet.

Covestro, which was spun off from Bayer in 2015, said it would reach its target of 5 billion euros ($6.19 billion) for cumulative operating cash flow after deductions for investments in the three years through 2019 instead of five years, as previously targeted.

That was even though it said, in its earnings statement on Tuesday, that it would significantly increase spending on plants and gear, so it can take further advantage of expected growth by industrial customers such as makers of auto parts and construction materials.

The improved cash flow outlook was “above expectations, underpinning management’s confidence that the high margin levels will not materially reverse in the coming years,” Barclays analyst Sebastian Satz said.

Shares in Covestro rose 2.7 percent to 92.42 euros by 1048 GMT, the biggest gain on the STOXX Europe 600 Chemicals index , which was 0.7 percent higher.

Global construction activity is driving sales of building insulation, and demand for lightweight car parts such as sunroofs made out of transparent plastics and reinforced plastic parts is growing as battery-powered vehicles need to shed weight.

“For 2018, Covestro expects solid growth in the main customer industries,” said Chief Executive Patrick Thomas. Sales volumes at its main product lines should grow in the low to mid single-digit percentage range, faster than the overall economy, the company said.

That echoed confidence voiced by German cement maker HeidelbergCement, which on Tuesday predicted economic growth would fuel building material sales this year.

Quarterly earnings before interest, taxes, depreciation and amortisation (EBITDA) more than doubled to 879 million euros, above the 840 million euros expected on average in a Reuters poll of analysts.

The industry’s past budgets for investment in areas such as foam chemicals, car seats and heat insulation turned out to be too conservative, and a number of technical setbacks and disruptions from Hurricane Harvey exacerbated supply shortages.

A share buyback programme, which boosted the share price when it was began last year, would probably be continued beyond 2019, when Covestro plans to ask shareholders for renewed permission to do so at the annual meeting, the CEO said.

Analysts and investors are looking for clues as to how long the boom will last. Companies such as DowDupont and Saudi Aramco are ratcheting up investment plans to bring greater chemical output capacity on stream.

Covestro said 2018 EBITDA would likely be around the previous year’s level, while the first-quarter number would be significantly above the year-earlier level.

$1 = 0.8076 euros Reporting by Ludwig Burger and reporting by Patricia Weiss, editing by Christoph Steitz, Maria Sheahan, Larry King