Covestro Earnings: Performance Exceeds Guidance and Consensus Despite Decline in Sales

No-moat Covestro 1COV reported first-quarter EBITDA of EUR 286 million, down 64.5% over 2022, but higher than the company’s own expectations of EUR 100 million-EUR 150 million and Vara consensus. The decline was due to increasing raw material and energy costs and lower demand in both of its segments. Despite the 20.1% drop in group sales, the company was able to limit the negative impacts and focus on efficiency as part of its maintainable future strategy, which was shown in the EBITDA margin improvement from the negative level in fourth-quarter 2022 to 7.6% in first-quarter 2023. Covestro increased its guidance for 2023, with EBITDA expected to be between EUR 1.1 billion and EUR 1.6 billion, and free operating cash flow between EUR 0 to EUR 500 million. The company says it will resume its share buyback program, and the focus will remain on maintainable growth and the circular economy. The market was pleased, sending the shares up 9%. Our 2023 EBITDA forecast is broadly in line with the new guidance. We don’t expect a material change to our EUR 52 fair value estimate. At current levels, shares look undervalued.

The performance materials segment witnessed a sharp drop of 72% year over year to EUR 173 million, primarily due to a combination of lower profit margins and a decrease in sales volumes resulting from supply/demand dynamics. Similarly, the solutions and specialties segment witnessed a decline of 26.3% year over year to EUR 165 million, attributed mainly to the decrease in volumes sold. However, lower prices for raw materials drove an improvement in profit margins, partly mitigating the decline.