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The DAX Group has lowered its profit forecast for the current fiscal year despite an increase in operating profits in the first quarter. The new outlook is lower than market expectations.
Covestro now expects earnings before interest, tax, depreciation and amortization (EBITDA) of between 2 and 2.5 billion euros. So far, the group was aiming for 2.5 to 3 billion euros. The current consensus of Vara analysts is 2.7 billion euros. In the second quarter, the group expects an EBITDA of 430 to 530 million euros. In the first quarter, it rose to 806 million euros against 743 million euros the previous year. Analysts expected 774 million euros.
Covestro now expects free cash flow in 2022 of 400 to 900 million euros instead of 1 to 1.5 billion euros. Analysts had recently assumed 1.2 billion here. In the first quarter, it was 17 million euros.
The Group has lowered its outlook for return on capital employed above the weighted average cost of capital (ROCE) to 1 to 5 percentage points against 5 to 9 points previously.
Greenhouse gas emissions, measured in terms of CO2 equivalents, are now expected to be between 5.5 and 6.0 million tonnes. So far, Covestro had promised 5.6 to 6.1 million.
Covestro lowers forecast mainly due to China lockdown
By lowering its earnings forecast, Covestro was primarily reacting to lockdown restrictions imposed by the Chinese government in Shanghai, where the materials maker has a large site. Chief Financial Officer Thomas Toepfer said in an interview with Dow Jones Newswires that it was possible to maintain production while the workforce was working in a bubble. In the meantime, however, logistical and supplier issues have worsened so much that “second quarter sales fell quite sharply.”
On Monday night, Covestro surprisingly cut the operating profit target corridor by 500 million euros. The plastics and coatings maker now expects earnings before interest, tax, depreciation and amortization (EBITDA) of 2 to 2.5 billion euros instead of 2.5 to 3 billion euros previously. According to Toepfer, the main factor is the situation in China. In addition, Covestro assumes that the global economy will slow down and no longer expects global GDP growth of 4% but 3% for 2022.
In the first three months, Covestro benefited from continued strong demand momentum. “We were completely sold again,” Toepfer said. On the other hand, the prices of raw materials and energy, which increased by 820 million euros, had a negative effect. 90% of these cost increases were passed on to customers. However, the CFO believes that in the coming months it will no longer be possible to pass on costs to the same extent as before: “We already assume that there will be pressure on the margin.”
Toepfer also raised expectations for energy costs. While he still assumed in March that spending on electricity and gas would increase by around 500 million to 1.5 billion euros this year, he now sees the energy bill at between 1.7 and 2, 0 billion euros.
Covestro will continue to push forward its €500 million share buyback program, as Toepfer said. After the first tranche of 75 million euros was completed on April 6, the next tranche could follow shortly. The price level is currently attractive. Covestro shares were trading at a discount of 4.2% to 39.69 euros in early trading in Frankfurt.
Doom and gloom outlook pushes Covestro to 2020 low
A lowered earnings target for the current year hit Covestro shares hard on Tuesday. Investors are worried about growth prospects. Despite better-than-expected first-quarter numbers, the plastics processor’s share price plummeted. It fell to its lowest level since mid-August 2020.
By the end of trading, the moderately rising DAX share certificates had fallen 4.85% to 39.40 euros. According to Baader Bank analyst Markus Mayer, given recent price developments relative to the broader market and industry, some of the reduced forecast may have already been priced in. , but he was not surprised by the clearly negative reaction of stocks. after the statements made the night before.
Several analysts, including Mayer of JPMorgan and Jefferies, praised the good first quarter, and in particular the earnings before interest, taxes, depreciation and amortization (Ebitda) of 806 million euros. However, the capped annual target for this indicator was a “negative surprise,” Mayer wrote. JPMorgan expert Chetan Udeshi added that the second quarter will now be significantly weaker than consensus expected, as the midpoint of management’s forecast is soon 30% lower than the average analyst estimate. For 2022, Udeshi also expects market estimates to fall by 10-15%.
“The magnitude of Covestro’s forecast reduction highlights the significant uncertainties in global commodity chemical markets,” said Chris Counihan of Jefferies. This confirms his view that positive first-quarter surprises in the industry should not be extrapolated to the full year in the first quarter. , the building up of inventories by customers who wanted to hedge against higher prices, which should then dampen demand in the future.
Despite all the challenges, Covestro has a “comfortable level of debt” according to Counihan, so the company can continue to make higher payments in the form of share buybacks and dividends.
FRANKFURT (Dow Jones/dpa-AFX)
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