DNB Markets - Nexam Chemical: Significant opportunity on horizon

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Offering a strong sustainability and economic business case, Nexam Chemical is exposed to structural growth, and has already built strong relationships with market leaders in its focus areas. We believe the runway for growth and improving margins as early as 2022 is not reflected in the valuation, with the stock trading at a 40% discount to our peer group. We initiate coverage with a fair value of SEK8–12.

Solid business case ‘riding’ on sustainability trends. Nexam Chemical’s products enhance the properties and performance of polymers, allowing end-users to substitute more expensive and heavier materials – with clear cost benefits while improving resource efficiency as well as reducing weight and energy consumption. The company is commercialising its decade-long R&D investment programme, and has built close working relationships with market leaders within its focus areas.

Material potential. Target markets include aerospace, where reducing weight and maximising resource efficiency are key to becoming more environmentally friendly. Demand from the wind energy sector is already strong, and the company is working with three of the four largest PET foam manufacturers. We calculate Performance Chemicals has a 5% share of an addressable market worth SEK1.7bn, for which we see prospects of 7% annual growth. In our view, PET foam yields cSEK8 in fair value per share and the high performance and Polyethylene (PE) pipes opportunity cSEK1 in fair value per share, offering potential upside if it can also prove itself in these segments.

Well positioned for >30% sales CAGR and margin gains. In our view Nexam Chemical is well placed to meet its 2022 revenue target of SEK275m–325m, with strong underlying growth trends (>100% in 2019) in Performance Chemicals, and considering the DIAB agreement alone equates to 35% of the target, we see ample scope for a 2019–2022 sales CAGR of 32%. We believe it is now approaching EBITDA breakeven, and expect increased purchasing power and volume growth to drive up gross margins, which together with higher fixed-cost absorption, yields an EBIT margin just shy of 10% by 2022e.

We initiate coverage with a SEK8–12/share fair value based on specialty polymer peers’ 2022e EV/sales, a small-cap/high-growth regression valuation and our DCF. On our estimates, Nexam Chemical is trading at a 2022e EV/sales of 1.6x, a 40% discount to peers, which we find unwarranted given we expect it to outgrow peers by c4x.

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Viktor Trollsten | DNB Markets | Equity Research
DNB Bank ASA, Filial Sverige
E-mail: viktor.trollsten@dnb.se  | www.dnb.no


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