DNB Markets - Nexam Chemical: Significant Potential On The Horizon

Nexam Chemical continues to deliver on our forecasts and we are gaining confidence in its profitable growth journey. Growth remained impressive in Q4 at 46%, which we believe highlights the company’s significant potential beyond its 2022 sales target, driven by a good business case for the plastic industry to increase recyclability and better use of plastic materials. The stock is selling at a 2022e EV/sales of 2.6x. We have lifted our fair value to SEK13–17 (10–14).

Details from the Q4 report. We find it encouraging that the company continues to deliver on our forecasts with Q4 sales 3% above our estimate, translating into strong growth of 46% while EBITDA was positive for the fourth consecutive quarter, in our view yet another testimony to the profitable growth story. Our key conclusions from the quarter are: 1) the Uponor settlement could offer a sizable sales opportunity of around the “triple-digit millions” in the long term we believe, if successfully commercialised; 2) we believe PET fibre could be the next growth leg and offer meaningful volumes in 2–3 years; and 3) breakeven volumes appear to have been reached and we are gaining confidence in our 10% EBIT margin by 2022e as the company continues to gain economies of scale and gross margin contribution.

Profitable growth and earnings multiples in sight. We believe Nexam Chemical is well-placed to deliver on its 2022 sales target of a cSEK300m run rate by 2022 and on our forecasts implies a 2020–2022e sales CAGR of 37%. As volumes increase, our margin forecasts appear more achievable, driven by a 3%-point gross margin contribution and 7%-point economies of scale on an opex level. We forecast that the company is set to reach an EBIT profit by 2021, and we note that the valuation implies a 2022e EV/EBITDA of 19x on our forecasts.

Estimate changes. Following the report we have lifted our 2021–2022e sales and EBITDA by 5%.

Fair value raised to SEK13–17 (10–14). Although the stock price has risen recently, we note that it is still trading 23% below our specialty polymer peer group. We continue to base our fair value on our DCF peers’ 2022e EV/sales of 3.5x, applied to our sales forecast. We believe the company’s recent results highlight its growth potential beyond its 2022e financial target.