Pan European Chemicals
2009 outlook: Stay selective,
too early to overweight sector
Tim Jones
Research Analyst
(44) 20 754 76763
tim.jones@db.com
Virginie Boucher-Ferte
Research Analyst
(44) 20 754 57940
virginie.boucher-ferte@db.com
Martin Dunwoodie, CFA
Research Analyst
(44) 20 754 72852
martin.dunwoodie@db.com
Glynis Johnson
Research Analyst
(44) 20 75474030
glynis.johnson@db.com
Summary: Stay selective in 2009 and focus on stock-specific stories
Macro pressure in 2009 is understood by markets but many companies have yet
to reflect this in guidance. The risk remains that some companies have yet to
adjust strategies to embrace the growing pressures. Absolute valuations for many
are attractive although market relative valuations are less so. Individual companies'
strategies on restructuring, balance sheet management and cashflow remain
critical. Our top picks for 2009 are BASF, Bayer, Linde and Syngenta. It remains
too early to overweight this sector ahead of some very difficult newsflow.
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LOCATED IN APPENDIX 1.
Sector Strategy
Top picks
BASF (BASF.DE),EUR25.10 Buy
Bayer (BAYG.DE),EUR40.68 Buy
Linde (LING.DE),EUR57.43 Buy
Syngenta (SYNN.VX),CHF218.20 Buy
Companies featured
BASF (BASF.DE),EUR25.10 Buy
2007A 2008E 2009E
DB EPS (EUR) 4.16 3.82 2.87
P/E (x) 10.7 6.6 8.8
EV/EBITA (x) 7.5 5.2 7.7
Bayer (BAYG.DE),EUR40.68 Buy
2007A 2008E 2009E
DB EPS (EUR) 3.80 4.29 4.58
P/E (x) 13.7 9.5 8.9
EV/EBITA (x) 17.9 10.5 8.0
Linde (LING.DE),EUR57.43 Buy
2007A 2008E 2009E
DB EPS (EUR) 5.04 5.83 6.37
P/E (x) 16.7 9.8 9.0
EV/EBITDA (x) 6.6 6.0 6.0
Syngenta (SYNN.VX),CHF218.20 Buy
2007A 2008E 2009E
DB EPS (USD) 12.44 17.01 19.87
P/E (x) 16.1 10.6 9.0
EV/EBITA (x) 13.7 9.6 8.3
Arkema (AKE.PA),EUR15.14 Sell
2007A 2008E 2009E
DB EPS (EUR) 2.93 3.01 1.96
P/E (x) 15.1 5.0 7.7
EV/EBITA (x) 14.0 6.2 11.1
Solvay (SOLB.BR),EUR56.16 Sell
2007A 2008E 2009E
DB EPS (EUR) 9.21 5.80 6.23
P/E (x) 12.0 9.7 9.0
EV/EBITA (x) 9.4 7.1 8.3
Global Markets Research Company
2009 will be tough but volume trends unlikely to worsen from current levels
2009 will be tough as weak demand combines with price deflation through most
of the chemicals chain. Nevertheless, we expect Q4 08 and Q1 09 to mark the
weakest points in this cycle as customers anticipate this weakness and de-stock
inventories aggressively. We assume H2 09 shows no macro recovery but the
year-on-year rate of volume decline should slow due to de-stocking cessation. It
may seem optimistic but we actually see possible upside to H2 09 as historically
customers stay with very low inventories for only a short period. We note that
through the 2001-03 period the fastest rate of volume decline occurred at the start
of the downturn with positive volumes seen by most in H2 02 and H1 03.
EPS forecasts and valuation – it’s too risky to make a “buy all cyclicals” call
We have made no EPS changes in this note – we believe our forecasts are
balanced assuming 1% GDP in 2009 (although we accept that for the most cyclical
names visibility is very low). Q4 08/Q1 09 reporting will be tough and catalyse
further consensus downgrades (we are below consensus for 19/23 names)
although we note that for a minority of names we have now entered into a period
of consensus “competition” to produce the lowest forecasts (we view this as a
positive). Absolute valuations are low (especially for the cyclicals) but we only
advocate buying names on value where we have strong confidence over the level
of trough earnings, provided by historic trough data. Market relative valuations,
however, are less supportive for most names (see pages 45-53).
Companies need to do more to cope in 2009
Corporate risks should increase in 2009 and as yet few have really acknowledged
this (some still appear relatively optimistic). In this note we have looked at some of
the issues on a “to do” list for CEO/CFOs in 2009 including pensions, debt
financing, M&A and cost cutting (see pages 13-27). In summary, self-help
measures need to increase to offset growing pressures but with many names in
the sector not existing as listed entities in previous downturns, slow action and
poor communication remain risks. We look for experienced management making
proactive moves now – BASF and Linde are examples amongst several others.
Summary of stocks picks, valuation and risks (see page 5 for details)
With strong macro pressures and almost unidentifiable cyclicality for numerous
names, we believe it remains too early to overweight the sector. Nevertheless we
see some good stock opportunities. Our top picks for 2009 are BASF, Linde,
Bayer and Syngenta. We also favour Croda (top UK pick) and Symrise. On the
negative side, we see further downside risk at Solvay and Arkema (both Sell
rated) while we also struggle to see enough upside to offset near-term risks at
Clariant, DSM, Lanxess, AkzoNobel Air Liquide and Givaudan. We value the
sector using DCF and SOTP models. Risks include FX, GDP and energy prices.

Table of Contents
Investment thesis.............................................................................. 3
Outlook and sector summary....................................................................................................3
Summary of stock recommendations .......................................................................................4
Valuation and risks.....................................................................................................................5
Sector outlook................................................................................... 6
Sector summary – volume weakness to continue, pricing tougher ..........................................6
Raw materials should decline but ‘other’ cost pressures continue...........................................8
The focus on cost cutting needs to increase ..........................................................................10
FX moves now supportive ......................................................................................................11
Cashflow under more pressure – capex likely to fall for some................................................13
We expect only selective M&A in 2009 ..................................................................................14
Disposal of non-strategic assets could generate cash ............................................................16
Dividend payout ratios likely to rise in 2009............................................................................16
Some buybacks suspended but could provide upside if resumed..........................................19
Sector debt analysis ....................................................................... 21
Pension analysis.............................................................................. 23
Pension obligation and deficit size ..........................................................................................24
Assumptions: asset returns and discount rates ......................................................................24
Sensitivities .............................................................................................................................26
Sub-sector summaries.................................................................... 28
Commodity chemicals – the cycle has turned.........................................................................28
Specialty chemicals – be very selective, focus on niche growth.............................................31
Flavours & fragrances – growth continues..............................................................................33
Industrial gases – improved fundamentals..............................................................................35
Agrochemicals – 2009: the return of pricing power ................................................................40
Fertilizers –Short-term ‘blip’ but long-term fundamentals robust ............................................42
Hybrids – more growth required but value does exist in our view..........................................43
Sector valuation .............................................................................. 45
Valuation 1: Sector valuation multiples show some value.......................................................45
Valuation 2: Too early to buy all cyclicals ................................................................................46
Valuation 3: Balance sheet values and returns show some value ...........................................49
Valuation 4: Historic P/E valuations (compared to the market) ................................................50
Valuation 5: Historic P/E valuations (absolute).........................................................................51
Top picks for 2009........................................................................... 54
BASF................................................................................................. 55
Outlook...................................................................................................................................56
BASF appears to be mostly discounting a tough downturn....................................................57
Bayer ................................................................................................ 60
Syngenta.......................................................................................... 65
Linde................................................................................................. 68
Global valuation sheet.................................................................... 72
Reporting calendar ......................................................................... 77