European Chemicals: Q3 15 results preview: More of the same, but trimming sector forecasts

Deutsche Bank Markets Research Europe Chemicals Bulk Industry European Chemicals Date 6 October 2015 Results Q3 15 results preview: More of the same, but trimming sector forecasts Summary: Q3 similar to Q2, but sector EPS forecasts trimmed ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Tim Jones Research Analyst (+44) 20 754-76763 tim.jones@db.com Martin Dunwoodie, CFA Research Analyst (+44) 20 754-72852 martin.dunwoodie@db.com Virginie Boucher-Ferte Research Analyst (+44) 20 754-57940 virginie.boucher-ferte@db.com Key Changes Company Target Price Rating SOLB.BR 115.00 to 85.00(EUR) Hold to Sell Source: Deutsche Bank Top picks BASF (BASFn.DE),EUR69.54 Buy AkzoNobel (AKZO.AS),EUR58.78 Buy Linde (LING.DE),EUR148.35 Buy Symrise (SY1G.DE),EUR55.48 Buy Synthomer (SYNTS.L),GBP334.00 Buy Source: Deutsche Bank Related recent research Date Databook: Q3 15 - the groundhog quarter 23 Sept 2015 Databook: Subdued demand may persist, but robust sector EBITgrowth continues 24 Jun 2015 Pan European Chemicals: Moving (almost) into a sweetspot 18 May 2015 Source: Deutsche Bank We see Q3 reporting as likely to be similar to Q2 reporting with volume trends remaining muted (no blow-up in China, but Brazil a bit softer) with sector profit growth supported by incremental raw material deflation, FX and "self-help". We expect mgmt teams to remain conservative on outlooks with a greater focus on cash return, M&A and self-help. As usual, there will be some “beats” and “misses” but we have generally trimmed sector forecasts for 2016 onwards to reflect softer macro (3% GDP) with more material cuts for some. Some names offer good dividend yields (>4%) and low valuations. Top sector picks: Akzo, BASF, Linde, Symrise, Synthomer. We have cut Solvay to SELL. No demand disaster in Q3 – China isn’t blowing up, but maybe Brazil has Demand trends through Q3 appear to have been broadly similar to that seen in Q2. They key issue remains the “volatility in China” but we note that recent discussions with companies/consultants highlight that Q3 does not appear to represent a step-down in the long-term trend of a slowing China. In some parts of automotive in China the trend may be more severe but autos is typically not more than 15% of a companies’ Chinese sales. We expect solid US growth and a normal modest summer European slowdown. Brazil is perhaps the only country where sequential erosion is noted (exacerbated by Real decline) with Solvay, Givaudan, Clariant, Croda, Symrise, Yara and Syngenta most exposed. Oil & Gas related businesses may also have seen incremental pressure in Q3. Profit growth supported by (less positive) FX and more raw material deflation FX still remains a tailwind (for Euro names) with a likely positive impact in Q3, however a part of the benefit would be likely offset by the depreciation of some EM currencies. Oil prices have fallen by >E10/bbl in Q3 which has resulted in sequential deflation of basic petchems (ethylene/propylene prices have fallen 15-20% in two months) implying additional raw material deflation in Q3. Companies’ abilities to retain benefits will depend on business mixes but this should be supportive to many names through Q4 15 and into H1 16. Very mixed trends by subsector Most bulk names should report robust profit growth (albeit remain on lower-cycle margins) helped by raw material deflation, self help and FX. Specialties should generally be robust helped by FX, incremental raw material benefits and self-help albeit some of the more consumer names will be impacted by Brazil. Gases should continue to see a soft top-line with FX/cost cutting supporting profit growth. In agriculture Q3 will have been weak due to low soft commodities, weak Brazil and FX (depreciation of some EM currencies). Where will the “beats” and “misses” be? We expect mgmt outlook comments to remain conservative due to macro uncertainty but on-going communication around self-help, product mix, cash return and M&A is expected. On Q3s, we see the ”beats” or perceived strong performances at Symrise, Evonik, Akzo with “misses” at ICL, Clariant, Solvay, JMAT. We see BASF, DSM and Syngenta “not missing” despite market fears. Sector view, valuation and top picks We continue to see numerous opportunities driven by a mix of “self-help”