Personal Finance

Thursday 24 July 2014

Chemicals giant has the right mix of ventures

Dr John Lynch

Published 31/03/2014|02:30

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L'Oreal would be one of a solid portfolio of shares according to Dr John Lynch.
L'Oreal would be one of a solid portfolio of shares according to Dr John Lynch.

I think you would need to be an obsessive chemical engineer to really understand how important the company we are analysing today actually is. It is a 150-year-old Belgian company called Solvay, which has pioneered many chemical innovations and processes in its time and is dedicated to massive research projects for the future.

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But for the purposes of this column it may simply be enough to know that Solvay is a European giant with a worldwide reach, a competitive advantage and happens to be making huge inroads into the expanding economies of the Far East.

In addition, it may also be enough to know that its shares are quoted in euro, so avoiding any exchange risk. In other words, it would be a good fit for a portfolio of solid European shares that also includes some of this column's favourite shares such as Essilor, Inditex, Daimler, Kone and L'Oreal.

Chemical innovators like handing their name down and Solvay is yet another eponymous chemical giant. Founded by Ernest Gaston Solvay when he was only 23, he developed and patented a process for manufacturing soda ash using seawater, ammonia and carbolic acid.

He set up his first plant in Charleroi, the Belgian town that Ryanair made famous when it called it 'Brussels'. Within a decade, Solvay was expanding into the UK, Germany, Russia and USA. By the beginning of the last century the 'Solvay process' accounted for 95pc of the world's soda production.

The Solvay group survived not only two world wars but surprisingly retained its manufacturing secrets. Early in the 1950s it resumed its worldwide expansion. Today, Solvay is headquartered in Brussels and has global revenue of €10bn, with 70 plants worldwide, a presence in 55 countries, 29,000 employees, 13 major global R&D centres with 2,000 researchers and registered 500 patents in the past three years. Having divested itself of its pharmaceutical business in 2008, the company focus is on producing chemical and plastic like soda ash, peroxide, silica, food and flagrance, flavours and many others.

It has five operating businesses and supplies products to an array of industries such as construction, energy, electronics, healthcare, agriculture, environment and paper. The consumer business accounts for 25pc of group sales, supplying a range of flavours and fibres used in cleaning, nutrition, textiles and sport equipment.

The second major business for Solvay is the automotive and aerospace sectors contributing 17pc to group sales. It also provides plastics and special polymers to reduce the weight of vehicles, so helping fuel consumption. The construction business is focused on solvents and products used in insulation, electrical wiring and pipes. The remaining businesses include solutions for the solar and wind energy, medical imaging, cameras and flat-screen displays.

Last year was a mixed one for Solvay. Its turnover and operating profit declined slightly, with sales of €10bn and operating profit of €1.6bn. However, the company has a competitive advantage as 90pc of its revenue is generated from business in the top three global leaders in their field.

Last year, also saw a geographical transformation. Two years ago, European sales provided 40pc of group sales; in 2013, it dropped to one-third. Last May, Solvay announced a joint venture of its PVC unit with the Swiss based Ineos Group. However, the proposal was referred to the EU and a decision is expected next month.

Sales to the Asia/Pacific region jumped 6pc to almost 30pc of group sales, and its presence being enhanced with capacity increases in India and consolidation in China and Thailand. Today, up to two-fifths of Solvay sales are in high-growth countries and one-third of its workforce. In addition, half of Solvay investments are now being made in countries like Russia, China, India and South Korea.

Solvay, one of the largest global chemical companies and valued at €9.6bn, is quoted on the NYSE Euronext in Brussels and Paris. This dual listing is consistent with the company's history having a significant presence in both Belgian and France. Its shares are trading at €114, with a price-earnings multiple of a challenging 39 times.

This year the outlook is for a 6pc rise in sales and a slight improvement in operating performance. For 2015, the company remains cautious.

NOTHING PUBLISHED IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER IMPLICIT OR EXPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED

Irish Independent

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