Summary

  • Global specialty chemicals company Evonik is most active in EMEA (Europe, Middle East and Africa) as almost half of revenue comes from that region.
  • The company’s dividend is safe and yields almost 4%.
  • Sales were down 7% over 2020 with significant drop in demand, particularly in automotive and fuel industries. Nutrition & Care division fared well while Performance Materials sales fell sharply.
  • Debt – to – equity is 48.5%, relatively high but it is well covered by operating cash flow. Interest payments are also well covered by operating profit.
  • According to the stock evaluation method based on P/E investors could expect solid 8% annual return from this stock in the coming years.
Dividend    Revenue    Profitability    Financial Strength    Investment Case

Evonik (EVK) is one of the world leaders in specialty chemicals present in more than 100 countries. It has production facilities in 27 countries. The customers are mainly industrial companies that use Evonik’s products for further processing.

Evonik has the following five divisions:

  • Specialty Additives – comprises versatile additives and high – performance crosslinkers. The specialties shape markets for coatings, mobility, environmental, infrastructure and consumer goods.
  • Nutrition & Care – the division has three business lines: Health Care, Care Solutions and Animal Nutrition. Provides solutions for markets including medical, pharmaceutical, nutrition, personal care and others. The company has strong expertise in biotechnology.
  • Smart Materials – supplies materials to the automotive, paints, coatings, construction and other sectors.
  • Performance Materials – supplies products which are used in mobility, nutrition, pharmaceuticals and other areas. Processes in this division make intensive use of energy and raw materials.
  • Technology & Infrastructure – develops and builds integrated chemical production plants. There are ten sites in Germany and more of them outside of the country.

Evonik expects growth in Specialty Additives, Nutrition & Care and Smart Materials divisions as they operate in market with above average growth rate. Next Generation Solutions products comprise 35% of chemical portfolio of the company. They offer growth and sustainability benefits to customers. Over 2020 the company spent on R&D EUR 0.43 B.

In 2020 Evonik acquired two companies: the US company PeroxyChem, a manufacturer of hydrogen peroxide and peracetic acid, and catalysts specialist Porocel. Both join Materials division.

The company builds new production complex for the specialty polymer and two new gas – fired power plants in Germany that are expected to come into service in 2021 and 2022.

  Dividend

Dividend Dividend Yield 5Y Growth Payout Ratio
EUR 1.15 per share 3.95% 0% per year 115%

The company has paid the constant dividend of EUR 1.15 for six years in a row. 2020 was no exception despite challenges caused by the pandemic. The dividend is well covered by free cash flow (FCF) as FCF exceeds dividend payment amount by 45%. Payout ratio exceeds 100% for that year but average for 5 years payout ratio is 67%. So under normalized conditions the dividend should be well covered by earnings. Dividend yield of almost 4% is solid and is high compared to other companies in the industry. We could reasonably expect that the company would continue paying the same fixed dividend in the future.

   Revenue

Revenue 5Y Growth Revenue growth over 2020 Company Outlook 2021
EUR 12.2 B

 

 

 

 

 

-2% p. a.

 

 

 

 

 

 

Total sales                       -7%

By divisions:

Specialty Additives      -5%

Nutrition & Care         +2%

Smart Materials          -4%

Perform. Materials    -25%

Technology & Infrastr. -4%

EUR 12 B – 14 B

Volume growth in the growth divisions: 3%+

 

 

 

 

Sales are down 7% over the year. There has been significant drop in demand, particularly in automotive and fuel industries. Integration of PeroxyChem had a positive effect. Sales in Nutrition & Care were higher due to slightly higher volumes and prices for healthcare and animal nutrition products. In Performance Materials sales fell sharply due to a significant drop in prices as a result of lower demand. Sales has been in downtrend since 2017. With the company’s focus on growth that should change in the future.

In the outlook 2021 the company indicates quite wide range of sales from EUR 12 B to EUR 14 B. However Q1 report already shows the strong start into the year. Sales were up 4% year – on – year and organic sales growth was 8% (exchange rate has 4% negative effect).

  Profitability

Profit 5Y Growth Net Profit Margin ROE Company Outlook 2021
EPS EUR 1

Net Profit EUR 0.465 B

-14% p. a.

 

4.12% in 2020

5.9% in 2019

6.3% in 2020

 

Adjusted EBITDA: EUR 2.1 B -2.3 B

Adjusted EBITDA margin: 18% – 20%

EPS was down from EUR 4.52 in 2019 to EUR 1 in 2020 while adjusted EPS was down form EUR 1.94 to EUR 1.37. Adjusted EBITDA decreased by 11% to EUR 1.9 B and its margin was 15.6%. It was positively impacted by cost cutting measures and consolidation of PeroxyChem. Nutrition & Care division was the only one to increase earnings due to high demand. Other divisions had lower earnings over year, particularly Performance Materials with 65% decline in adjusted EBITDA. Net profit was EUR 0.465 B. In 2019 it was much higher, EUR 2.127 B, due to the proceeds from the divestment of the methacrylates business. In Q1 adjusted EBITDA was up 15% and adjusted EBITDA margin was 17.5%. Average EPS over pre-crisis years 2015 – 2019 is EUR 2.4 per share. We assume that in the next 5 years EPS would approach that average value when the impact of the pandemic subdues.

  Financial Strength

Company Capital Structure

In EUR B

Year 2019 2020  
Equity 9.060 8.099  
Cash 1.165 0.563  
Debt 4.518 3.932  
Net Debt 2.141 2.886  
Debt/Equity 50% 48.5%  

Net financial debt increased as a result of acquisitions. However debt – to – equity ratio decreased as equity was also down. Debt is well covered as operating cash flow is 44% of debt and interest coverage by operating profit is 4.8x. Evonik has S&P rating of BBB+.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
Dividend should be constant at EUR 1.15 in the future. So the total dividend income over the next 5 years would amount to EUR 5.75.

We could assume EPS to be EUR 2.4 per share in 5 years.

Projected stock price
Average P/E over the last 5 years (15.64) multiplied by EPS in 5 years =15.64 x EUR 2.4 = EUR 37.54
Future Returns Based on the Assumptions
Stock price upside potential                                       27%    from the current price EUR 29.59

Overall return on investment*                                  46%

Compound Annual Return on Investment                8%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Stock price of Evonik is up from EUR 15.55 on March 18, 2020 to EUR 29.59 as of yesterday’s close.

According to our stock price projection model there is 27% of upside potential of the price. Under our assumptions investors could expect solid 8% of annual return from this stock.

Evonik is in a cyclical business, so sales and profits suffer during downturns. However the company has exposure to resilient customer industries through its Nutrition & Care division and gets substantial part of its income through that division. Focus on growth markets of EMEA, safe dividend and reasonable valuation makes Evonik worth to be part of balanced portfolio with long term investment horizon.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next three days.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.

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