Synthomer (LSE:SYNT) shares have been on a downward track since the height of the pandemic. The firm, which makes products like latex gloves, surged as the virus spread around the world and demand for its goods skyrocketed.
But the share price has been sliding since mid-2021. And today it fell 11% in morning trading. However, I still see plenty of value in this British-based chemicals business.
In fact, I’m already a shareholder in Synthomer, and I benefitted from the last big dividend payout, although I am down overall.
So let’s take a closer look at its performance and see whether I should buy more.
Profits halved but management confident
The headline data from the earnings report on Tuesday was that profits for the six months to 30 June more than halved year on year. Pre-tax profit fell to £114.7m from £272.4m in the same period a year earlier.
However, Synthomer’s management struck a confident note, highlighting that all segments had grown apart from the elastomers arm and that revenues were up 8.6% to £1.33bn. The firm noted that the elastomers arm performed exceptionally well in the prior year due to peak demand for nitrile butadiene rubber (NBR) related to the Covid pandemic.
Chief executive Michael Willome said: “These results demonstrate the solid performance of the business compared to pre pandemic levels with EBITDA significantly ahead of 2020 and 2019 and good levels of organic profit growth“.
Earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to £173.1m from £322.7m a year earlier. However, EDITDA remained ahead of the £100.2m generated in 2020 and the £99.7m seen in 2019.
Earnings per share came in at 19p versus 49p a year earlier.
Why I’m bullish on Synthomer
Profits from the elastomers segment dropped from £224m in the first six months of 2021, to just £41.8m in the last six months. But we all knew this was coming eventually. Elastomers include products like latex gloves that were much in demand during the pandemic.
But this is a growing business that appears to be using its pandemic profits to create a stable platform for future growth. Earnings in functional solutions and industrial specialities grew substantially, while acrylate monomers showed modest growth. The newly acquired adhesive technologies division added £18m in earnings.
I also think the stock represents good value. It currently has a price-to-earnings ratio of around 11. That’s certainly not expensive for a company that is growing in all but one of its business segments.
Synthomer has remained confident on its strategy for growth throughout the year. The company recently said that it has a “proven growth strategy” that will contribute to the business’s development in the coming years.
And while demand for latex gloves and other elastomers is clearly normalising, the persistent nature of Covid is likely to keep demand above pre-pandemic levels for some time.
Would I buy Synthomer stock?
At the current price, yes, I would buy more Synthomer stock for my portfolio. I appreciate the business is going through a transitionary period with the adhesive technologies acquisition and a new CEO, but I see this as a cheap, growing business.
It still has an attractive dividend yield of around 6.5%, having cut the dividend payments from 8.7p to 4p. Until today, the dividend yield sat around 13%, although it clearly wasn’t sustainable.