Elementis — Increasingly active

Elementis — Increasingly active

The new executive team has set out its stall and taken a visible, significant step towards executing a vigorous strategy of active portfolio management. After a down year in FY16, earnings are on a recovery track this year and a stronger run rate is expected in FY18. The valuation is on a growth footing and, at this early stage, indications support gathering earnings momentum.

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Written by

Elementis

Increasingly active

Speciality chemicals

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3 March 2017

Price

297p

Market cap

£1,377m

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Share details

Code

ELM

Listing

LSE

Shares in issue

463.5m

Business description

Elementis is an international speciality chemicals business with primary activities in Specialty Products (FY16: 70% of group net revenue/75% of underlying EBIT before central costs) and Chromium (24%/26%). Specialty Products is further split out into coatings (FY16: c 78% divisional sales), personal care (14%) and energy (8%). Elementis also has a relatively small, single site Surfactants division.

Bull

Product portfolio with a number of strongly profitable market positions.

New management catalyst for growth focus, not relying on market improvement.

Good cash credentials, pensions impact reduced.

Bear

Non-US Chromium business challenges.

Oil field chemical additive demand also at lower levels, although modest improvement seen.

Significant UK pension obligations, but well managed.

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

The new executive team has set out its stall and taken a visible, significant step towards executing a vigorous strategy of active portfolio management. After a down year in FY16, earnings are on a recovery track this year and a stronger run rate is expected in FY18. The valuation is on a growth footing and, at this early stage, indications support gathering earnings momentum.

Focusing on higher-growth opportunities

FY16 mixed operational performance had been well flagged and results were consistent with this, with some excellent progress offset by areas affected by exogenous (FX and oil price) factors. Momentum in personal care is particularly interesting; it was the fastest growing FY16 subsector (CER FY +14%, H2 +23%), having been backed with additional sales and technical resource. Moreover, the acquisition of SummitReheis (for an expected U$360m, announced on 10 February, completion by mid-year subject to regulatory review) adds scale, profits and synergy fit. Specifically, capability in antiperspirant active ingredients brings significant opportunities to the enlarged subsector. The board was sufficiently confident in future cash generation to maintain the underlying dividend and pay a slightly increased special dividend (together with the final yielding 3.8%).

Positive markers for progress

Underlying FY17 progress will largely be driven by incremental gains from business improvement programmes, which will gather momentum as the year progresses. A possible exit from Surfactants would free up cash and management time. Alongside the SummitReheis (SR) acquisition, these are two examples of active portfolio management and clearly demonstrate the influence of new financial discipline. SR is to contribute for six months in FY17, with full year effects from FY18. By the end of FY17, management expects net debt:EBITDA to be c 1.8x, declining by c 0.4x pa under normal trading conditions. This leaves scope to add further complementary acquisitions and continue to pay out a healthy dividend stream.

Valuation: Several strings to FY18 progress

The share price responded well to the SR acquisition announcement, but has since settled in the middle of its ytd trading range. The SR full year effect brings the FY18 P/E down sharply. By this time, the impact of underlying business improvement actions should be more apparent, and SR synergies at or above indicated levels would provide scope for faster earnings progression. On this timescale, stronger chromium and/or energy sector recovery could further boost group progress.

Consensus estimates

Year
end

Revenue
(US$m)

PBT
(US$m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

678.4

115.2

20.6

16.45*

18.0

4.4

12/16

659.5

89.7

16.8

16.80*

22.1

4.5

12/17e

746.7

105.2

18.3

10.54

20.2

2.8

12/18e

833.0

124.2

21.2

11.83

17.5

3.2

Source: Bloomberg. Note: *FY15 and FY16 include declared special dividend.

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Gear4music Holdings — On song

Gear4music (G4M) has ended the year with 58% revenue growth, slightly ahead of expectations, and has also guided to profit performance marginally ahead. Driven by European sales growth, this shows continuing development of its international presence, as does the opening of (now) two distribution centres on the mainland. Sales growth is now building against strong growth last year, and the strategic argument for medium-term investment continues to strengthen.

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