Despite relatively strong results in 2021 and a better-than-expected start to 2022, Lanxess (OTCPK:LNXSF) (OTC:LNXSY), a German chemical company, saw its share price drop to rock bottom since the start of COVID. And if you exclude the COVID-dip in 2020, the current share price is even trading at its lowest level in six years, so I was starting to take a closer look at Lanxess to see if the current share price is attractive enough to go long.
Lanxess has its primary listing in Germany where it trades with LXS as its ticker symbol. Average daily volume exceeds 400,000 shares per day. The German listing also offers options, which could be interesting to sell put options with the aim of initiating a long position. The company has approximately 86.3 million shares outstanding, giving a market capitalization of approximately €3.2 billion.
The Lanxess website contains download links only, but interested investors can find all relevant information (including financial results and annual reports) at this link.
2021 has been a good year
Lanxess operates in four major divisions, each with its own focus and targeted customer base. The Advanced Intermediates segment mainly serves the construction industry, the specialty additives division has specialty lubricants and flame retardants in its product segment while it also provides additives to the rubber, plastic and painting. I am also very interested in the Customer Protection division which includes the production of disinfectants and agrochemicals. And finally, Engineering Materials produces high-tech plastics and high-performance composites.
All four divisions recorded higher turnover in 2021 and the company’s consolidated turnover amounted to almost 7.6 billion euros, an increase of more than 20% compared to to the previous year. Gross margin increased at a rate of just under 20%, confirming some pressure on margins, but fortunately EBIT increased by almost 40% thanks to the company’s ability to control its R&D expenses and G&A. In addition, the total amount of “other” operating expenses decreased, which helped boost EBIT.
On top of that, net interest expense decreased from €56 million to €51 million, resulting in pre-tax income of €303 million and net income of €267 million. euros. This includes €48 million of discontinued operations and net income from continuing operations attributable to ordinary shareholders of Lanxess was approximately €219 million or €2.52 per share.
Lanxess reported operating cash flow of €439 million from continuing operations, but this includes a net investment of approximately €396 million in the working capital position. Also, the cash flow statement shows that Lanxess only paid about 10 million euros in taxes (against the 84 million euros due), so I would also like to include an adjustment of 74 million euros to reflect the normalized tax bill. There was also just under 50 million euros in lease payments (which I assume are included in “other financial disbursements”) and on an adjusted basis operating cash flow was around €719 million (including €8 million of dividends received and interest payments) .
Total capex was €479 million, meaning capex + lease payments are in line with amortization and impairment charges, resulting in a free cash flow result of €240 million euros. Spread over the 86.35 million shares, the free cash flow result was approximately EUR 2.77 per share.
At the end of 2021, Lanxess had €643 million in cash and €491 million in cash-like assets (money market funds). The balance sheet also contained €3.5 billion in financial liabilities, which translated to net debt of just under €2.4 billion. Considering that the EBITDA for the 2021 financial year amounted to 1.01 billion euros, the debt ratio of approximately 2.4 times EBITDA is very reasonable. And since EBITDA will increase and net debt will decrease this year, I don’t anticipate any balance sheet concerns.
Moreover, the debt repayment schedule is well structured and after this year no principal debt repayments are due in 2023 or 2024.
The company also timed its latest bond issue very well. In the fourth quarter of 2021, it raised €600 million in a green bond issue with a coupon of just 0.625% (the coupon will be tied to Lanxess meeting its sustainability targets).
2022 is off to a strong start and has even exceeded the company’s already optimistic forecast
Despite some uncertainty in the markets, Lanxess appeared quite positive when it released its first outlook for 2022. Despite much higher raw material and energy prices, the company was able to pass on these additional costs to its customer base. Therefore, it expected moderate to strong growth across all of its four divisions.
The official guidance was to see an EBITDA “significantly” above the 2021 level (1.01 billion euros), and Lanxess expected a first quarter EBITDA of 280 to 320 million euros and in a put trading update, the company confirmed that its first quarter EBITDA was 320 million. EUR before exceptional items.
This is an impressive performance in the first quarter and it clearly shows that Lanxess has indeed been able to increase the prices of its products to mitigate the impact of higher energy prices and increased costs. raw material.
I think it’s prudent to expect an annual EBITDA above 1.1 billion euros (which would mean that the company should only generate 800 million euros of EBITDA over the next three quarters ), which should increase the free cash flow result to EUR 320-330m for almost EUR 4 per share. This makes Lanxess relatively cheap while the strong net cash flow and dividend (which will likely cost the company less than €100m) will help reduce net debt.
Trading at an enterprise value of around €5.6 billion, an EBITDA of just over €1.1 billion indicates that the company is trading at an EV/EBITDA ratio of around 5 .
The entire chemical sector is currently trading at low multiples as the market is valuing in a slowing global economy (BASF, Covestro,… are all trading at low valuations meaning Lanxess is not materially or excessively cheaper than these peers). This also pushes option premiums up and a P28 expiring in September can be purchased for an option premium of around EUR 1.25, while a P24 expiring in December can be purchased for a premium of around 1.10 EUR. I think writing put options makes a lot of sense to me trying to initiate a long position on Lanxess.