Evonik’s fundamental strengths come at a full price

The listing of the speciality chemicals company marks the largest German IPO since 2007. Evonik supplies compounds for an array of uses from biodiesel and chicken feed to Plexiglas. It has a solid sales and profit record – but a share price at the rich end of fair value.

For once, Evonik was favoured by fortune. On the eve of its fourth attempt to list on the German stock exchange, Borussia Dortmund, the soccer club sponsored by the speciality chemical group, thrashed Real Madrid 4-1 in the Champions League semi-final. The morning after, Evonik’s stock market debut was also successful, if less demonstrable.

With annual sales of 13.6 billion euros, Evonik is one of the world’s leading companies in the sector. Its diverse product range encompasses additives that go into coatings for pills to compounds deployed in car tyres, batteries and wind turbines. Every fourth nappy in the world uses Evonik’s super-absorbent material, while its amino-acids help feed 45 billion chickens a year.

The company looks fundamentally healthy. It earns three- quarters of its revenue outside Germany and is investing with conviction in Asian growth markets. Evonik boasts a solid history of rising sales and profit: it enjoys an EBITDA margin of 19 percent. At 1.5 billion euros, net debt stands at 0.6 times of EBITDA, lower than most European peers.

This strength hardly comes cheap, however. The company’s enterprise value is the equivalent of seven times EBITDA and the shares trade at about 13 times forward-looking earnings’ estimates. These are in line with, or perhaps a little ahead of, the average for the pan-European DJ Stoxx index and peers in the diversified chemicals sector.

The difficult macroeconomic environment will dent profitability. In the current year, management expects rising sales but stagnating profit. Moreover, there’s a problem with the potential over-supply of Evonik shares. Both of the pre-IPO owners want to reduce their stakes in the company. The RAG Foundation, which holds around 68 percent, has a long-term ambition to reduce its share to 25.1 percent. British private equity group CVC, which currently owns 18 percent, wants to get out completely.

New shareholders must hope these intentions are pursued in a measured way. Until the stock overhang issue is resolved, however, Evonik’s share price performance is unlikely to score as impressively as the Dortmund soccer team it sponsors.

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