Investidea: Evonik, because the Germans can and can

Инвестидея: Evonik, потому что немцы умеют и могут

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 duration: 13% for 14 months excluding dividends; 7,5% annual 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. Hopefully, 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 are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

If you want to be the first to know, did the investment idea work, subscribe: as soon as it becomes known, we will inform.

And what about the author's predictions

Research, for example 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 perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline: as with the investment in general, 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 her 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 his 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 his proceeds.

Smart materials — 27%. Coatings and various materials, which are used in industry. Adjusted pre-tax profit margin of the segment - 8,34% from his proceeds.

  HES : Hess Corporation

Materials for industry — 16%. Various chemical ingredients and technologies to strengthen products and increase product life. The segment's adjusted pre-tax profit margin in 2020 was negative - minus 2,26% from his proceeds. The segment was quite profitable in 2019, its margin was 5,9% from his proceeds.

Services — 6%. Technical services and industrial management. Unprofitable segment: the segment's adjusted pre-tax profit margin is minus 9,8% from his proceeds.

Distribution of company orders by industry:

  1. Consumer and personal care products - 20%.
  2. Automotive and mechanical engineering - 20%.
  3. Food for humans and animal feed - 15%.
  4. Construction - 11%.
  5. Plastic and rubber - 8%.
  6. Pharmaceutical production - 7%.
  7. Metals and petroleum products - 5%.
  8. All the rest: paper and printing, paints and coatings, electronics and power supply, Agriculture, renewable energy and other, unnamed industries - 14%.

Revenue by country and region:

  1. Europe, Middle East and Africa - 48%.
  2. North America - 24%.
  3. Central and Latin American countries - 5%.
  4. Asian-Pacific area - 23%.

Main sales of the company by country:

  1. USA - 21,2%.
  2. Germany - 17%.
  3. China - 9,33%.
  4. Switzerland - 4,43%.
  5. Netherlands - 4,08%.
  6. Japan - 3,51%.
  7. France - 2,72%.
  8. Brazil - 2,72%.
  9. United Kingdom - 2,48%.
  10. Italy - 2,41%.

Distribution of company assets by country:

  1. Germany - 40,73%.
  2. USA - 29,68%.
  3. Singapore - 7,59%.
  4. Belgium - 5,71%.
  5. China - 4,3%.

The rest falls on other countries.

Инвестидея: Evonik, потому что немцы умеют и могут

Инвестидея: Evonik, потому что немцы умеют и могут

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. More importantly, 4 November, the company released a report for 3 neighborhood, which looks very dignified 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 taking into account these difficulties, the result is excellent. Evonik is a solid business, showing excellent results even in difficult conditions, - which can attract many investors. A plus here will be a good level of diversification of Evonik's income by product type 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 disclosing the social and environmental impact of its activities, and providing specific numbers, and in general there is progress.

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If you read her materials carefully, then one gets the impression, that the company's management, tongue sticking out and tail wagging, seeks to prove to investors the maximum environmental friendliness of their business. The ESG lobby loves this behavior in the corporate sector and for this it can reward Evonik with pumping quotes or at least increased ease of obtaining loans..

Looking at Sustainalytics' ESG Evonik Rating, then in its subgroup of 465 chemical companies it is in 31st place - a very decent result in its category. For comparison: BASF is in 63rd place. Evonik, from the perspective of a socially concerned investor, is a good combination of a working business and an ethical approach.

For money to work and the sun to shine all year round. The company pays 1,15 € dividend per share per year, which gives approximately 4,09% annual. This is a good passive yield by American standards., but in German - just gigantic. This alone can make it possible to pump 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 Anglo-Saxon countries and continental European countries.:

  • 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.: Exxon and Shell cases show, that investors are extremely favorable to the fact, how "dirty companies do good deeds". Moreover, the "bad" here is RAG, and Evonik follows a progressive agenda.

  How to choose dividend stocks: manager's advice

there is, however, from RAG and plus: Evonik's dividend is very important to them, they largely finance the costly environmental projects of RAG. Therefore, dividends will be cut in the very last place - and in theory they will even increase.

Against all. Industrial growth in Germany and Europe, according to the most recent data, starts to slow down. This may indicate, that a lack 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 large part of the company's revenue.

The logistics factor seems to be especially problematic - after all, Evonik has a business all over the world.. Taken together, all these negative points could indicate a possible decrease in orders or profitability for Evonik in the next quarter., but they may not indicate: for 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 for that, that these problems will be reflected in Evonik's reporting.

And if 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 in arrears, of which 3.569 billion need to be repaid within a year. There is not much money at the disposal of the company, to be enough for everything: 1,877 billion in debts of counterparties and 821 million in accounts.

I do not think, that Evonik will have big problems getting a loan, considering its importance for the German economy, - but it can play against dividends, and they may well be cut. And then the stock can seriously fall. Well, basically, large debt can scare off some investors.

What is the bottom line

Shares can be taken now by 28,11 €. And then there are two options for action.:

  1. 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. I think, the shares will reach this level in the following 14 months;
  2. hold shares 15 years, receiving dividends.

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