Stuart Mitchell of S. W. Mitchell Capital presented his investment thesis on Lanxess (Germany: LXS) at European Investing Summit 2024.
Thesis summary:
Lanxess was created in 2004, following the strategic decision by Bayer to spin off a significant portion of its chemical and polymer businesses into a separate group. Since then, Lanxess has made a number of acquisitions and divestments in an effort to reduce its sensitive to the business cycle, and to the car industry in particular (now just 10% of revenues).
Major transactions include the purchase, in 2016, of the flame-retardant company Chemtura, followed two years later by the sale of its performance rubber business Arlanxeo to Saudi Aramco. In 2022 Lanxess purchased the microbial control unit of International Flavors and Fragrances. And last year, the private equity group Advent created a new company, Envalior, by merging DSM’s Engineering Materials unit with Lanxess’s High Performance Materials division; Lanxess owns 41% of Envalior.
The group comprises three main business areas:
- Consumer Protection (37% of sales): chemicals for material protection, flavours, fragrances, liquid purification; fine chemicals producer Saltigo
- Specialty Additives (36%) for polymers and lubricants; speciality rubber company Rhein Chemie
- Advanced Intermediates (27%) for industrial use; inorganic pigments
Sales by region, 2023: Americas 35%, Germany 16%, Other EMEA 30%, Asia 19%
2023 was a challenging year for Lanxess. Sales and EBITDA declined by 17% and 44%, respectively. The company was nevertheless still able to generate €275 million operational FCF and release €577 million of cash by reducing working capital to sales from 25% to 21%. In addition, Lanxess received a €1.27 billion payment from Advent following the creation of Envalior. Management also immediately cut costs by €50 million through hiring freezes and expect to save a further €150 million through operational efficiencies.
Crucially, management has significantly reduced the debt profile. Net debt was down by 35% at the close of 2023 at just shy of €2.5 billion. Its nearest bond repayment, €502 million, is not until May 2025. There is a further €499 million to refinance in October 2026 and the next repayment, a €497 million bond, is not until September 2027. The company held €496 million cash at the end of 2023 and has €1.8 billion of undrawn credit lines. Thus, even if the expected recovery in the industry takes longer than expected to materialise, Lanxess should be able easily to cope with the upcoming bond repayments.
Furthermore, the group may well be able to reduce debt more quickly than anticipated: Urethane Systems is for sale, and may be worth €500 million. The group should also be able to generate some €200 million FCF in 2024. Lanxess also have an option to sell its 41% stake in Envalior to Advent in 2026.
After a difficult year, the chemical industry is now at last beginning to stabilise and may indeed be starting to recover. Lanxess’s business should in the medium term be able to grow at along with GDP, while the Speciality Additives business may be able to grow faster, boosted by strong flame-retardant growth.
According to Stuart, the recent market quotation of the shares implies a compelling 3.5x EV to EBITDA in a more normal economic environment.
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About the instructor:
Stuart Mitchell is the Managing Partner and CIO of S. W. Mitchell Capital and the Investment Manager of the SWMC European Fund, as well as a number of managed accounts.
Prior to founding SWMC in 2005 Stuart was a Principal, Director and Head of Specialist Equities at JO Hambro Investment Management (JOHIM, now Waverton Investment Management). At JOHIM he set up and managed the Charlemagne Fund, a long/short European fund, and the JOHIM European Fund, a long only European fund. The JOHIM European Fund rose by 133% since inception in December 1998 until March 2005 compared with 8% for the benchmark index and was number 1 rated by Micropal within its sector and three star ranked by S&P.
Upon leaving university in 1987 Stuart joined Morgan Grenfell Asset Management (MGAM) and soon afterwards assumed responsibility for managing the continental European equity assets for MGAM’s British pension fund clients. Stuart was appointed a director of MGAM in 1996. He was then made Head of European Equities and was responsible for $27 billion of equity assets. Whilst at MGAM he managed the Morgan Grenfell European Fund which rose by 123% from January 1990 to June 1996 compared with 85% for the benchmark index and was awarded 1st place by Micropal (5 year awards) in 1996.
Stuart was born in Scotland and educated at Fettes College and St. Andrews University where he read Medieval History. He is also a graduate of the Owner/President Management programme from the Harvard Business School. Stuart speaks English and French.
