Lanxess’ Q4 EBITDA in Line, but Recessionary Environment Looms

No-moat Lanxess LXS reported fourth-quarter EBITDA of EUR 175 million, up 2% versus 2021 and broadly in line with Vara consensus. The results reflect strong pricing in all segments offset by low utilization, mainly in the advanced intermediates segment due to low demand in construction and also some customer destocking. Despite seemingly decent results, the shares were down sharply intraday, around 10%. We surmise this is due mainly to overall risk-off behaviour in the markets today, given turmoil in the European banking sector. Indeed, other European cyclical chemical stocks were down 4%-5% intraday. Furthermore, Lanxess was relatively downbeat in its outlook for the economy in 2023, with guidance for full-year EBITDA to be flat versus 2022 and first-quarter EBITDA to be down significantly at EUR 180 million-EUR 220 million (previous year: EUR 320 million). A weak 2023 is in line with our current view. Consequently, we don’t expect to make a material change to our EUR 69 fair value estimate. At current levels, the shares look significantly undervalued.

Compared with last year, EBITDA for advanced intermediates declined 29%. Volume was down 22%, mostly due to the sharp decline in demand from the construction industry. Additionally, lower utilization and internal inventory management adversely affected margins. In contrast, specialty additives once again emerged as the top performer for the quarter, with EBITDA showing a remarkable 52% increase from the previous year. Although volume decreased 12% due to weaker demand for polymer additives and Rhein Chemie, this decline was somewhat offset by a favorable currency tailwind. Consumer protection EBITDA was up 17%, but this was mainly due to the contribution from the recently acquired microbial control business from International Flavors & Fragrances. Volume was down 3%, held back by customer destocking.