Europe’s woes and slowing activity in China have strangled the world economy. One victim is Yule Catto, a global manufacturer of the speciality polymers that are used in coatings, building products, carpets, paper, adhesives, plastics and PVC. On 27 June, the company revealed that “demand is a little weaker than the first few months of the year”, and added that it expects a further £5m to be lopped off profits because of the volatile euro.
Of greatest concern is the fact that its leading position in nitrile butadiene rubber (NBR, accounting for 15% of sales) has come under pressure from oversupply, destocking and aggressive pricing in Asia. NBR had previously enjoyed strong growth as the healthcare industry adopted it for use in sterile gloves as natural rubber can provoke allergic reactions. Yet the 20% fall in the shares still looks like a major over-reaction.
The group’s non-nitrile businesses are ticking along nicely in emerging markets (40% of revenues), and the European arm is benefiting from the £388m acquisition of German rival PolymerLatex in March 2011. This deal doubled the size of the group, widened its geographical reach and further beefed up its economies of scale. Overall cost savings should fully compensate for the volume declines.
The board anticipates that full-year profits before tax will be ahead of 2011’s £96m. And assuming tensions in Iran continue to unwind, then oil prices may slide further, leading to a boost in earnings, thanks to lower input costs on petrochemicals.
Yule Catto (LSE: YULC), rated a BUY by Canaccord Genuity
The City is forecasting turnover and underlying earnings per share of £1.2bn and 21.8p respectively, rising to £1.3bn and 24.0p in 2013. I value the stock on a nine times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for the £171m of net debt and a £164m pension deficit, that delivers an intrinsic worth of 190p a share. At today’s price there has to be an outside chance that a predator like Dow Chemical could launch a bid.
The firm faces integration challenges, albeit 15 months on many of those have been dealt with. Investors should also watch out for foreign-exchange and raw-material price movements. Nonetheless, with number one or two positions in many of its chosen sectors, Yule looks far too cheap, trading on a price/earnings ratio of less than seven and with a 3% dividend yield. Canaccord Genuity has a target price of 290p, and half-year results are scheduled for 28 August.
Rating: BUY at 140p
• Paul Hill also writes a share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634.