Following the agreement to acquire US polymers peer Omnova for US$824mln in early July, which only accelerated the shares’ descent, the Swiss bank removed its ‘sell’ rating and moved to ‘neutral’, while also cutting its price target to 310p from 326p.
The shares were up 2% to 297.2p on Friday morning.
With the prior sell rating based on low growth in end markets, oversupply in the nitrile latex market, plus Synthomer’s premium valuation versus European peers, the analysts’ new base case still assumes limited recovery in the key end markets.
Omnova is expected to bring US$29.6mln of ‘synergies’ but bring a short-term risk of 58% of its sales being exposed to the US economy as growth rates there start to slow.
“We believe that the enlarged group can continue the shift towards more speciality products, rationalise production sites particularly in Europe and allow Synthomer to sell more products in the US.”
Assuming the acquisition of is completed at the start of 2020, UBS increased its forecasts for underlying earnings per share for 2020 and 2021 by 1% and 6%.
UBS said the shares still trade at a 10% premium to EU diversified peers, but this “is warranted” given the support Synthomer’s high free cash flow yield, which is expected to average 9% between 2020 and 2022.