Today we have a moderately speculative idea.: take shares of the German chemical company Evonik (ETR: EVK), in order to capitalize on the growth of orders in this area.
Growth potential and validity: 13% behind 14 months excluding dividends; 7,5% per annum during 15 years including dividends.
Why stocks can go up: the situation for the company is positive.
How do we act: we take shares now by 28,11 €.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
If you want to be the first to know, did the investment work?, subscribe: as soon as it becomes known, we will inform.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company is engaged in chemical production. According to its annual report, the proceeds are divided like this.
Special additives — 26%. Chemical ingredients for use in a wide variety of industries. Adjusted pre-tax profit margin of the segment - 21,11% from its proceeds.
Nutrition and personal care — 25%. Ingredients for human and animal nutrition, as well as personal care products. Adjusted pre-tax profit margin of the segment - 10,06% from its proceeds.
Smart materials — 27%. Coatings and various materials, which are used in industry. Adjusted pre-tax profit margin of the segment - 8,34% from its proceeds.
Materials for industry — 16%. Various chemical ingredients and technologies to strengthen products and increase their service life. The segment's adjusted pre-tax profit margin in 2020 was negative - minus 2,26% from its proceeds. In 2019, the segment was quite profitable, its margin was 5,9% from its proceeds.
Services — 6%. Technical Services and Industrial Management. Unprofitable segment: the segment's adjusted pre-tax profit margin is minus 9,8% from its proceeds.
Distribution of company orders by industry:
- Consumer and personal care products — 20%.
- Automotive and mechanical engineering - 20%.
- Food for people and feed for animals 15%.
- Construction - 11%.
- Plastic and rubber 8%.
- Pharmaceutical production - 7%.
- Metals and oil products — 5%.
- All the rest: paper and printing, paints and coatings, electronics and power supply, Agriculture, renewable energy and others, unnamed industries - 14%.
Revenue by country and region:
- Europe, Middle East and Africa - 48%.
- North America - 24%.
- Central and Latin American countries - 5%.
- Asian-Pacific area - 23%.
Main company sales by country:
- USA - 21,2%.
- Germany - 17%.
- China - 9,33%.
- Switzerland — 4,43%.
- Netherlands - 4,08%.
- Japan - 3,51%.
- France - 2,72%.
- Brazil — 2,72%.
- United Kingdom — 2,48%.
- Italy — 2,41%.
Distribution of company assets by country:
- Germany - 40,73%.
- USA - 29,68%.
- Singapore — 7,59%.
- Belgium — 5,71%.
- China - 4,3%.
The rest goes to other countries.
Arguments in favor of the company
Well done. Both BASF and Covestro, Evonik will have to be the beneficiary of the current industrial upsurge in the world. What's even more important, 4 November, the company released a report for 3 neighborhood, which looks very worthy given the serious problems with the rising cost of raw materials, logistics and labor.
The report turned out to be slightly worse than the overestimated expectations of analysts, but considering these difficulties, the result is excellent. Evonik is a strong business, showing excellent results even in difficult conditions, – which can attract many investors. The advantage here will be a good level of diversification of Evonik's income by type of product and industry.
Cheap. Company P / S — 0,92 and P / E in the area 18,42. In general, the company looks inexpensive.
ESG. In its reporting, the company pays attention to the disclosure of the social and environmental impact of its activities, and providing specific numbers, and in general there is progress.
If you read her materials carefully, then it seems, that the company's management, sticking out his tongue and wagging his tail, seeks to prove to investors the maximum environmental friendliness of their business. The ESG lobby loves this behavior in the corporate sector and can reward Evonik with a quote pump or at least increased ease of getting loans for it..
Looking at Sustainalytics' ESG Evonik Rating, then in its subgroup of 465 chemical companies it is in 31st place - a very worthy result in its category. For comparison: BASF in 63rd place. Evonik, from the point of view of a socially concerned investor, is a good combination of a working business and an ethical approach.
To make money work and the sun shine all year round. The company pays 1,15 € dividend per share per year, which gives approximately 4,09% per annum. This is a good passive income by American standards., but in German - just gigantic. This alone can allow pumping up the company's quotes at the expense of dividend investors.
What can get in the way
Major. Coal mining company RAG owns 56,9% Shares. This is a problem for two reasons..
Firstly, in the tradition of German majority shareholders to offend minority shareholders like you and me. German courts turn a blind eye to this, because these majority shareholders are large financial and industrial groups, which in exchange for cheap loans and political favors do not cut jobs, contributing to a high level of social stability. But in general there is a possibility, that RAG will learn something and minority shareholders will feel bad about it.
You can read the following articles on the differences in corporate governance practices between the Anglo-Saxon countries and the countries of continental Europe:
- Law and Finance (1998). Rafael La Porta, Florencio Lopez ‐ de ‐ Silanes, Andrei Shleifer, Robert W. Vishny;
- Ownership Concentration, ‘Private Benefits of Control’ and Debt Financing (2001). Igor Filatotchev and Tomasz Mickiewicz;
- Investor Protection and Corporate Valuation (2002). Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny.
Secondly, RAG's coal-fueled nature could reduce Evonik's pumping potential at the expense of green investors. This is a purely theoretical risk.: cases with Exxon and Shell show, that investors look extremely favorably on, how "dirty companies do good deeds". Moreover, the "bad" here is RAG, and Evonik follows a progressive agenda.
There is, however, by RAG and plus: Evonik's dividend is very important to them, at their expense, to a large extent, costly environmental projects RAG are financed. Therefore, dividends will be cut in the very last turn - and in theory they will even increase.
Against all. Industrial growth in Germany and Europe, according to the latest data, starts to slow down. This may indicate, that shortages of raw materials and delivery problems are forcing companies to slow down production. You should also consider the problems of the automotive industry.: This sector accounts for a significant portion of the company's revenue..
The logistical factor seems to be especially problematic - after all, Evonik has a business all over the world. Taken together, all of these negatives could point to a possible decline in orders or Evonik's profitability in the next quarter., but may not indicate: behind 3 quarter of 2021 Evonik showed a very decent result. But at this time all these problems were faced by companies around the world in full growth.. In any case, you should be prepared, that these problems will be reflected in the reporting of Evonik.
And if it's not enough? The company spends about 536 million euros on dividends per year - this is 75,28% from her profits for the past 12 Months.
Wherein, according to the latest report, the company has 12.437 billion euros of debt, of which 3.569 billion must be repaid within a year. Not much money at the disposal of the company, to have enough for everything: 1,877 billion debts of counterparties and 821 million on accounts.
I do not think, that Evonik will have big problems getting a loan, given its importance to the German economy, - but it can play against dividends, and they can be cut. And then stocks can seriously fall. Well, basically, large debt can scare off some investors.
What's the bottom line?
Shares can be taken now by 28,11 €. And then there are two options:
- wait, when a combination of the above positive factors will lead to an increase in the value of shares to 32 € - so much was asked for them back in September 2018. Think, the shares will reach this level in the following 14 Months;
- hold shares 15 years, receiving dividends.
