This Stock Has Surged Because of Covid. Why the Gains Can Continue.
Synthomer, a British-based chemical manufacturer that makes latex for medical gloves, has excelled during the pandemic as demand for personal protective equipment has soared.
The company’s U.K.-listed stock (ticker: SYNT.UK) has surged more than 70% over the past 12 months, far ahead of the gains of rival BASF of Germany, up 22%, and U.K.-based Croda International, up 53%.
The gains could well continue, with Synthomer poised to grab significantly more market share. The Essex-based company, with a market value of 2.29 billion pounds sterling ($3.14 billion), operates in 21 countries. In addition to latex, it makes such products as flooring adhesives and materials used in paint, packaging tape, and mattress foam. But latex has been the big growth engine.
Demand for protective gloves, masks, and gowns continued to outpace supply during the first half of 2021. Prices increased, helping Synthomer’s earnings before interest, taxes, depreciation, and amortization, or Ebidta, more than triple to £323 million. The strong results were further helped by better profit margins for nitrile latex, a material used for PPE.
Sebastian Bray, an analyst at broker Berenberg, estimates that this accounted for more than half of Synthomer’s earnings for the first half of 2021, with reported earnings more than quadrupling over the same period compared with the previous year.
Even with vaccine campaigns now mitigating the impact of pandemic, Covid-19 isn’t going away. The overall market for glove and PPE raw materials, including natural rubber and latex, is around five million tons annually worldwide; Synthomer produces just 440,000 tons.
The company will increase capacity, producing an additional 200,000 tons a year by 2024, says Bray. But even then, it will only control about 4% of the total market, so there is much business to win.
Jolyon Wellington, an analyst at broker Peel Hunt, estimates that a 200,000-ton increase in production will lift Ebitda by £53 million, increasing Synthomer’s total earnings to £428 million by 2025, from £259 million in 2020. He figures this could lift the shares by 30% to £7.
At a recent price of £5.40, the stock fetches a low multiple of 9.2 times this year’s expected earnings, or a healthy 60% discount to its peers.
The dynamics of the latex market are clearly helping the shares. “[The] nitrile latex market is sold out,” says Jaroslaw Pominkiewicz, an analyst at Jefferies. “Although several nitrile latex expansions are scheduled for completion in the coming years, we expect the incremental volumes will be absorbed with ease.” The only caveat is that profit margins are unlikely to remain as hearty, as rivals also ramp up production.
Caroline Johnstone, the company’s chairwoman, told Barron’s in a statement: “Synthomer has a proven strategy and a robust balance sheet, which underpin our confidence in being able to continue the group’s excellent momentum and deliver long-term growth and strong returns for our shareholders.”
The company has good prospects in its other divisions, too. Its construction products, such as waterproofing, could get a boost from increased urbanization, while materials it makes to keep diapers feeling dry could see stronger demand from the aging population.
Synthomer is also growing through acquisitions. It bought U.S. rival Omnova Solutions in 2020, and has a substantial war chest at its disposal. Pominkiewicz, for his part, looks for a “transformational acquisition” later this year.