Solvay Has High Ebitda Margins and Is Paying Down Debt

The Belgian company is one of the largest chemical companies in the world

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Solvay (SVYSF, Financial) is a Belgium-based chemicals company. The stock has great free cash flow and Ebitda margins but does carry debt. Management has undertaken many M&A deals in the last few months.

The stock trades at 111.35 euro ($116.82), there are 99.12 million shares and the market cap is 11.04 billion euro. Twelve-month diluted earnings per share are 4.05 euro and the price-earnings ratio is 27.5. The dividend was 3.30 euro last year and the dividend yield was 2.63%.

Sales have increased from 10.91 billion euro in 2012 to 11.83 billion euro in the last twelve months. Free cash flow has dropped from 672 million euro in 2012 to 449 million euro. Also over that time frame, sales and earnings have been a little choppy. The free cash flow yield is 4%, which is pretty decent in today’s low-return environment.

According to Morningstar, return on equity is 5.21%. An ROE is the single-digit range is not that great and that is what the metric has been over the last few years. However, Ebitda margins were 18.8% last year, which is good. Profit margins are thinner because of large interest payments on debt. The dividend has grown from 1.70 euro in 1995 to 3.30 euro last year. That is awesome! It paused but did not decrease growth during the financial crisis.

In 2015, 27% of revenues were derived in North America, 30% from Europe, 10% from Latin America and 33% from Asia. Of Ebitda, 20% was formulations, 42% was materials, 30% was chemicals and 8% was polymers.

In December of 2015, Solvay purchased U.S.-based Cytic. Cytic is a maker of materials for aerospace and automobiles. Management expects 10% annual growth for Cytic and synergies of 100 million euro.

Solvay manufacturers textiles, implantable medical devices, light-weight polymers, silica used in tires, films to coat windows, materials used to prevent corrosion or fire, sodium bicarbonate used in animal feed, production of flavors such as vanilla, materials used in oil drilling and pipelines, lithium salt used in batteries, solutions used in water treatment, materials used in 3-D printing, reagents in mining, metal and surface treatment, and hundreds of other applications. Some of the categories or chemicals and agents include: amines, phosphorous, acetic solvents, ketonic solvents, pyrocatechol, anisole, soda ash, peroxides, chlorides, acids and many more.

In the most recent quarter, Ebitda margins were 23%. Sales were down 8% year over year to 2.9 billion euro. This was due to issues in oil and gas, South America and lower raw materials. The outlook for 2016 is Ebitda to grow 7% to 8% and free cash flow to exceed 700 million euro.

The debt is rated BBB- by S&P. There is one billion euro in cash and 2.7 billion euro in accounts receivables. The liability side shows 1.4 billion euros in payables and 10.4 billion euros in debt. I agree with S&P’s assessment.

The company sold its cigarette filter division, Acetow, to Blackstone for about one billion euro. That will be a nice addition to the balance sheet. The resins business was recently sold to a German chemicals company. In December, Solvay sold its Asian PVC unit to Asahi Glass. Solvay has undertaken several other small M&A deals.

LyondellBasell (LYB, Financial) has an operating margin of 18.6%, which is high like Solvay. Basf (MIL:BASF, Financial) has an operating margin of about 9%. Each chemical company is a little different. Some concentrate on agriculture and others on paint or energy.

I like Solvay. There is not a lot of information on the company in the U.S. Once it gets its debt paid down, profitability will greatly improve. Free cash flow and Ebitda margins are healthy. It could be worth more on a sum-of-the-parts calculation. The company will be affected by the global economy, as it was in the most recent quarter. It is worth a look if you like chemical companies.

Disclosure: We do not own shares.

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