First to suffer, could be first to recover:
we look at financial strength, margin
resilience and potential from long-term
contracts. Here K+S (N (V)) and Symrise
(N (V)) look best placed
􀀗 Next theme after destocking will be
inventory devaluation for oil-related
companies without speciality products
􀀗 Q4 earnings misses and weak 2009
outlook could represent good entry point.
Lanxess is our top pick: low valuation
and strong (but cyclical) business model
Prepare for selective buys…
…but don’t move too early. We believe the Q4 2008 reporting
may include some negative news. In our view, Q1 2009 will be
difficult for most German chemicals stocks, given demand
weakness, especially from autos, construction and textiles,
exacerbated by client destocking; potential inventory writedowns
due to volatile commodity prices; and a potential rise in
refinancing costs. In the short term, we see a risk of inventory
write-offs at companies close to petrochemicals. On average
(excluding K+S and H&R Wasag), we expect 2009 EBITDA
margins to decline by 1.4ppt (we are now c8% below EBITDA
consensus) and forecast a 25% EPS decline y-o-y. The average
three-month EPS revision is c23%, which has lead PE ratios to
start to stabilise. After the significant destocking in Q4 2008
and very low demand in Q1 2009, we see a restocking/reflation
opportunity for Q2 2009. Chemical products are needed
immediately for production and aggressive destocking in
anticipation of falling prices should end. Hence, we would
expect the first signs of a turn in the economy to lead to a strong
recovery in chemicals. We do not expect capital increases in the
sector and forecast that most dividends are sustainable.

Improved sector
performance on horizon?
􀀗 After client inventory reductions, the next theme could be
inventory devaluation – but not for all companies
􀀗 The chemicals sector was one of the first to suffer, could it be one
of the first to recover? Will an inventory bounce pave the way?
􀀗 Weak outlook/earnings season could represent a good entry point.
Top pick is Lanxess: low valuation and strong business model
Share price (EUR) performance during 2007 and 2008, -32% 08 Valuation: 12-month forward