The Right Chemistry for the Post-Covid World
A year and a half after the Covid-19 pandemic devastated the world economy, we have seen a strong recovery with the widespread availability of vaccination. We sought to investigate the effects of the pandemic on the Specialty Chemical industry worldwide using data from the Specialty Chemicals 1500 index on Standard and Poor’s Capital IQ database and other qualitative research on companies in the index.
There were three purposes behind this research. The first was to assess the rate of recovery as pandemic restrictions were lifted and the economy rebounds. The second goal was to assess the general strength of the specialty chemical industry. The third was to explore some of the possible implications of business combinations going forward.
The conclusions of this report are limited by the fact that only information from publicly traded companies is available and should be treated accordingly.
Overall, multiples in the Specialty Chemicals Industry in the US have grown on average over the past twelve fiscal quarters, despite the Covid-19 pandemic. This change in the industry might stem from a multitude of reasons.
Figure 1: Specialty Chemicals Multiples from Q3 2018 to Q2 2021
In the case of Enterprise Value/Earnings Before Interest, Tax, Depreciation, and Amortization (EV/EBITDA multiples), the US specialty chemicals industry has seen increases in the last twelve months from 11.4x to 14.3x. This equates to a 25.4% increase.
Figure 2: Graph of EV/EBITDA LTM per Quarter
Looking at Enterprise Value/Earnings Before Interest and Tax (EV/EBIT), the multiple has been steadily increasing since Q3 2020 from 19.4x to 23.4x. In the recorded period, the multiple steadily increased each period, with the largest increase occurring between Q4 2020 and Q1 2021. This follows the same trends as EV/EBITDA ratios, steady increasing after the initial market crash of the Covid-19 crisis.
Figure 3: Graph of EV/EBIT LTM Per Quarter
In the case of Price/Book multiple (P/V), the multiple followed a downward trend from the second half of 2018 to June 2020, dropping from 3.7x to 2.3x. However, it has since gradually risen in the past year as the multiple has risen to 3.5x in June 2021 with a high of 3.6x coming in March 2021. Like the other two measurements of valuation multiples, we see the same trend of increasing multiples in the last few quarters.
Figure 4: Graph of Price/Book Value per Quarter
Turning to Price/Earnings multiples (P/E), the multiples stayed flat between September 2018 and June 2020, staying between 26.5x and 22.2x. Then in September 2020 the multiple experienced a notable 9.6x increase, a 43% step up, before trading sideways around 31x between September 2020 and June 2021. Consistent with other industries, P/E multiples saw a dramatic increase between Q2 and Q3 2020 after two quarters of decline. A Notable big mover was Livent Inc. which increased from 13.77x in Q3 2019 to 100.6x in Q4 2020. This was due to the increasing electrification of vehicles and their dependency on Lithium materials which Livent supplies. Livent also purchased Nemaska Lithium, a Lithium battery testing company in Q4 2020, showing that a strong inorganic growth operation can boost P/E ratios. Similarly, Albemarle, the world's largest Lithium producer, had P/E ratios in the bottom quartile of the specialty chemicals index in 2019, until they purchased three lithium mines in Australia in 2019. While these transactions alone cannot provide a definitive answer to P/E ratio movement, the company's acquisition strategies likely played a role in boosting shareholder confidence and prospects of future earnings.
Figure 5: Graph of Price/Earnings per Quarter
A powerful strategy to grow and diversify a specialty chemicals business should balance smart decisions about acquisitions and divestitures with core business investments. Divesting an underperforming business in a company’s portfolio is also important because it provides capital to reinvest in higher-growth businesses. A combination of effective strategies for the core business along with business combinations is a winning formula for long-term success.
Sam Jenkins, Research Associate, CDI Global Chicago Office
Matthew Johnson, Research Associate, CDI Global Chicago Office
Louis Yang, Research Associate, CDI Global Chicago Office