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Targets cut: Covestro share collapses: Covestro lowers earnings forecasts for 2022 | news

The DAX Group lowered its earnings forecasts for the current year despite an increase in operating earnings in the first quarter. The new outlook is below market expectations.

Covestro now expects profit before interest, taxes, depreciation and amortization (EBITDA) of between € 2 and € 2.5 billion. So far, the group had staked between 2.5 and 3 billion euros. The current consensus of Vara analysts is 2.7 billion euros. In the second quarter, the group expects an EBITDA of between 430 and 530 million euros. In the first quarter it rose to 806 million euros from 743 million euros the previous year. Analysts had expected € 774 million.

Covestro now sees free cash flow in 2022 of between 400 and 900 million euros instead of between 1 and 1.5 billion euros. Analysts had recently speculated 1.2 billion here. In the first quarter it was 17 million euros.

The Group has lowered the prospects of return on capital employed above the weighted average cost of capital (ROCE) from 1 to 5 percentage points from the previous 5 to 9 percentage points.

Greenhouse gas emissions, measured in terms of CO2 equivalent, should now be between 5.5 and 6.0 million tonnes. So far Covestro had promised from 5.6 to 6.1 million.

Covestro lowers forecasts mainly due to the blockade of China

By lowering its earnings forecast, Covestro reacted primarily to the Chinese government’s lockdown restrictions in Shanghai, where the materials manufacturer has a large site. CFO Thomas Toepfer said in an interview with Dow Jones Newswires that it was possible to continue production while the workforce worked in a bubble. In the meantime, however, logistics and supplier problems have worsened so dramatically that “second-quarter sales fell quite sharply.”

On Monday evening, Covestro surprisingly reduced the target corridor for operating profit by € 500 million. The plastics and coatings manufacturer now expects earnings before interest, taxes, depreciation and amortization (EBITDA) of 2 to 2.5 billion euros instead of the previous 2.5-3 billion euros. According to Toepfer, the main factor is the situation in China. Furthermore, Covestro assumes that the global economy will slow down and no longer expects global GDP growth of 4% but 3% by 2022.

In the first three months, Covestro benefited from persistent strong demand momentum. “We were completely exhausted again,” Toepfer said. On the other hand, the prices of raw materials and energy had a negative impact, up by 820 million euros. 90 percent of these cost increases have been passed on to customers. The chief financial officer, however, believes that in the coming months it will no longer be possible to transfer costs to the same extent as before: “We are already assuming that there will be pressure on the margin”.

Toepfer also revised its energy cost expectations upwards. While in March he still speculated 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 between 1.7 and 2.0 billion euros.

Covestro will continue to pursue its € 500 million share buyback program, Toepfer said. After the first tranche of EUR 75 million was completed on 6 April, the next tranche could follow shortly. The price level is currently attractive. Covestro shares traded at a 4.2 percent discount to EUR 39.69 in early trading in Frankfurt.

The pessimistic outlook pushes Covestro to lows since 2020

A bearish earnings target for the current year hit Covestro shares hard on Tuesday. Investors worry about growth prospects. Despite better-than-expected figures in the first quarter, the plastics manufacturer’s share price plummeted. It fell to its lowest level since mid-August 2020.

At the end of the trading day, the moderately growing share certificates in the DAX had fallen by 4.85% to EUR 39.40. According to Baader Bank analyst Markus Mayer, in light of recent price developments relative to the market and the sector in general, part of the reduced forecast may already have been included in the price, but he was not surprised by the markedly negative reaction from the shares. after the statements made the night before.

Several analysts, including JPMorgan’s Mayer and Jefferies, praised the good first quarter, and in particular the profit before interest, taxes, depreciation and amortization (Ebitda) of 806 million euros. However, the limited full-year 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 the consensus previously predicted, because half of management’s forecast will soon be 30% below the analyst’s average estimate. For 2022, Udeshi also expects market estimates to drop 10-15%.

“The magnitude of Covestro’s forecast reduction highlights the significant uncertainties in global basic chemicals markets,” said Chris Counihan of Jefferies. This confirms his view that the positive first quarter surprises in the industry should not be extrapolated to the full year in the first quarter, the accumulation of inventory by customers who wanted to arm themselves in this way against the price increase, which should then curb the demand later.

Despite all the challenges, Covestro has a “comfortable debt level” according to Counihan, so the company can continue to make higher payments in the form of share repurchases and dividends.

FRANKFURT (Dow Jones / dpa-AFX)

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