EVKIY - Evonik: We Are Lowering Yearly Estimates

2023-08-16 22:50:40 ET

Summary

• Evonik faces declining demand and lowered its 2023 outlook, leading to potential price target downgrades.
• Q2 results show a decrease in sales and EBITDA compared to last year.
• Changes to estimates include lower H2 EBITDA and a higher debt evolution. Despite Evonik is implementing cost-cutting measures, we lowered our price target to €20 per share.

After having analyzed BASF Q2 earnings , today we are back checking on Evonik Industries ([[EVKIF]]; [[EVKIY]]) after our latest release titled: " Portfolio Reshaping Continues . " The company faces a persistent and unparalleled declining demand (Fig 1). Therefore, after having checked Evonik's Q2 quarterly figures and listening to the Q&A analyst call today, we decided to lower our forward estimates. In addition, the company changes its 2023 outlook. The CEO confirmed a lower EBITDA between €1.60 and €1.8 billion on top-line sales of €14/16 billion (Fig 2). Cross-checking the company's mid-point EBITDA at €1.7 billion, we see that Wall Street pricing a higher EBITDA with the Visible Alpha consensus at €1.85 billion. Thus, Evonik might suffer from price target downgrades. Going deeper into the analysis, taking the 2022 cash flow from operation to EBITDA (36%), we implied a 2023 free cash flow estimate of €610 million versus a consensus projecting €796 million. After the FY results comment titled ' We'll Just Keep On Waiting ,' we are more skeptical about the short-term horizon, so we provide a few changes to our 12-month visible period estimates.

Source: Evonik Q2 results presentation - Fig 1

Fig 2

Q2 results

Evonik delivered an adjusted Q2 EBITDA of €450 million with top-line sales of €3.88 billion- This compared to the pre-announced Q2 guidance of EBITDA in the range of €430/€450 million, backed by a turnover of approximately €4 billion. In Q2, sales were down by 19% on a yearly basis, and this was predominantly driven by lower volumes (-9%) (slightly better than Q1 at -14%) declining price (-5%), and adverse currency headwind (-2%). At the EBITDA level, the company increased its adjusted EBITDA to €450 million from Q1 at €409 million (Fig 3). However, looking back, EBITDA decreased by 38% compared to last year. The CEO is implementing new cost-cutting measures to provide better marginality. The divisional basis (Fig 4) shows that Nutrition & Care EBITDA declined by 63% with raw material inflationary pressure from methionine prices. Destocking activities and weak demand also impacted Evonik's Specialty Additives division. Despite higher prices, EBITDA fell by 24% on a yearly comparison. The Smart Materials segment recorded lower volumes by 17% and Performance Materials with a declining demand of 6%. Both divisions were below consensus by 15% and 13%, respectively.

Fig 3

Fig 4

Changes to Estimates

Following the Q2 results and projecting the company's positive new cost-cutting measures, we apply the following changes:

1. Taking the company's mid-point of 2023 outlook, the implied H2 EBITDA is approximately €840 million and is down by 18% yearly and 2% below our expectation. In addition, related to the Q3 EBITDA, in the Q&A analyst call, the management guided seasonality weaker demand related to Q4 EBITDA;
2. Here at the Lab, we are forecasting sales at the higher end of Evonik guidance but at the low EBIT end. We anticipate a core operating profit of €750 million, with an EPS of €1.28. This is due to lower Chinese sales and a management that " no longer assumes any recovery in H2; "
3. On a positive note, Evonik confirmed cost-cutting savings of €250 million in H2. The company noted that H1 had already reached 40% of the target;
4. The company has also impaired Animal Nutrition and Silica for €305 and €84 million, respectively.
5. What is more important to note is the FCF evolution. In Q2, the company had an outflow of €203 million. Aside from the lower earnings, Evonik recorded higher capex (€237 million vs €165 million). Lower working capital requirements partially offset this performance;
6. On the CAPEX side, we aligned our view with Evonik's estimates . The company decided to limit CAPEX to around €850 million versus previous estimates of€975 million;
7. Despite that, at Q2 end, Evonik's net debt reached €4.2 billion versus the €3.3 billion achieved in Q1. This was due to the dividend payment outflow of €545 million. The company's net debt EBITDA reached 2.2x
8. As mentioned, Evonik lowered its pension deficit; however, in the period, it increased by €100 million (Fig 6) and this is an additional minus from our enterprise value to Evonik's equity value;
9. Combining H2 FCF, points 6, 7, and 8, we now forecasted a net debt of €3.5 billion at 2023 end;
10. Given the company's challenges, we are now projecting the same DPS for the next year (€1.17 per share).

Fig 5

Fig 6

Conclusion, Valuation, and Risk Statement

Given our financial changes, we decided to lower our target price from €23 to €20 per share, maintaining a buy rating. Our valuation is derived from a 2024 EPS of €1.66 backed by a P/E of 12x in line with Evonik's historical valuation. A volume recovery in H1 2024 supports this, and based on multiple cross-coverage in various sectors such as the paper segment; we believe we are at the end of clients' destocking activities (this is ). Downside risks include 1) economic slowdown, oversupply in methionine, and delays in exiting in the Performance Materials division. Additional risks are reported here .

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