DNB Markets - Nexam Chemical: Still set for impressive growth

Nexam Chemical reported Q2 sales 9% below our forecast driven mainly by lower than expected growth of 34% in Performance Chemicals (our estimate: 60%). However, we note that growth has historically been volatile between quarters and we still believe the company is well positioned to deliver on its growth potential while expanding margins. We note the valuation is at a 44% discount versus our peer group. Fair value maintained at SEK8–12.

Q2 highlights. Sales growth in Performance Chemicals was 34% YOY (we expected 60%), as Covid-19 had a larger than expected impact on order execution while we also attribute a large portion of the miss to timing effects between quarters. Growth in Performance Masterbatch was -11% owing mainly to Sweden. Gross margin of 42% was up 2%-points YOY driven by positive mix effect from increasing sales in Performance Chemicals.

Estimate changes. We have cut our 2020–2022e sales by c2% following the Q2 report and we are still in line with the company’s 2022e sales target range. We have cut our EBITDA forecasts by 5% on average, mainly on higher personnel costs.

Still positioned to deliver >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 31%. The Q2 supported our view that the company is approaching EBITDA breakeven, and expect increased purchasing power and volume growth to drive up gross margins, which together with higher fixed-cost absorption, should yield an EBIT margin just shy of 10% by 2022e.

Fair value of SEK8–12 reiterated, based on specialty polymer peers’ 2022e EV/sales, a small-cap/high growth regression valuation and our DCF, and corresponds to a 2022 P/E of 39.9x and EV/sales of 2.5x. On our valuation the stock is trading at a ~45% discount versus our peer group on an EV/sales of 1.6x while we note that we forecast the company to have 10%-points higher gross margins (and thus profitability potential) than its peers and we expect its growth rate to be c4x the rate of its peers.
 

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Best regards 

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Viktor Trollsten | DNB Markets | Equity Research
 
DNB Bank ASA, Filial Sverige
Visiting address: Regeringsgatan 59, Stockholm
Postal address: 105 88 Stockholm