Evonik Faced Strong Volume Declines in Q4 2022; Shares Undervalued

No-moat Evonik EVK reported fourth-quarter EBITDA of EUR 413 million, down 18% versus 2021 and about 9% below Vara consensus. The company faced volume declines in all segments and challenges with destocking and fixed costs not fully covered by production activity, resulting in negative earnings effects. However, active net working capital management and positive cash tax effects drove the strongest-ever free cash flow quarterly. Guidance for 2023 EBITDA of EUR 2.1 billion-EUR 2.4 billion was in line with Vara consensus expectations. Our 2023 EBITDA estimate is currently EUR 1.7 billion, but we don’t expect to make a material change to our EUR 25 fair value estimate. At current levels, the shares look undervalued.

The projected EBITDA indications for the upcoming year suggest that most growth segments are likely to remain stable or experience slight growth. Specialty additives and smart materials are expected to be driven by positive developments in energy efficiency and increased demand for H2O2 specialties and catalysts, respectively. However, nutrition and care is expected to decline, despite positive trends in healthcare. On the other hand, performance materials (the “nongrowth” segment) is predicted to experience a significant decline, with performance intermediates down significantly.

At group level, revenue in 2023 is projected to be slightly below 2022 sales of EUR 18.5 billion. Prices for specialty chemicals are predicted to remain stable or slightly decrease, whereas animal nutrition and performance intermediates may face more significant price declines. Energy cost increases are estimated to be lower than previously assumed at EUR 100 million. The internal raw material cost index is also expected to be slightly lower than in 2022. The company plans to counteract rising factor costs by implementing EUR 250 million in contingency measures. Management expects to achieve higher absolute free cash flow, with cash conversion moving toward the target of 40%.