Lanxess: echoes of past should worry shareholders about future

Lanxess chief executive Matthias Zachert invoked the global financial crisis last month to describe the dire state for speciality chemicals. Already the share price of his German company nods to that period. On Tuesday, its market value collapsed 15 per cent to its lowest since late 2009. That followed a profit warning, which arrived just six weeks after first-quarter results.

Business is not going well. Lanxess cut its 2023 ebitda outlook by 30 per cent blaming China’s sluggish recovery among other factors. That might not overly trouble veteran investors in cyclical industries such as chemicals. Unfortunately Lanxess is atypical. Its share price has gone precisely nowhere for well over a decade, until now. At about €27, it has fallen out of its long-term trading range.

That matters as investors clearly sense something is wrong. A series of acquisitions has recently bloated Zachert’s balance sheet with debt. Its invested capital base has expanded by more than 80 per cent to €10bn since 2019, according to Bloomberg data. Neither sales nor profits have followed suit. Thus the investment return on this capital has slid, just as borrowing costs have begun to climb.

And Lanxess has a bit of leverage. Usually, cyclical companies eschew debt given their earnings volatility. Not this one. Its net debt to forward ebitda has shot up to 4.3 times. That looks high compared with peers such as fellow German Covestro at 2 times, or Britain’s Croda with net debt at about half this year’s expected ebitda.

Analysts have nevertheless taken to Zachert, who promises to cut debt. Almost all their 25 recommendations are buys. They forecast an annual average free cash flow of €380mn through 2026, using S&P Capital IQ data. That suggests cash accumulation to come. Its next bond maturity does not fall before 2025.

Yet the market fears more profit warnings to come. Expect brokerage analysts to check their history books and rethink their recommendations.