DNB Markets - Nexam Chemical: Still waiting for Chemical Romance

Q1 sales were c13% below our forecast, driven by weaker sales growth in Performance Chemical than we expected. On a positive note, the Q1 gross margin was solid (improving 370bp QOQ) and cash flow improved in the quarter. Nexam also obtained an extended overdraft facility to SEK20m, strengthening the financial position further. We have lowered our 2023e sales following the Q1 results, but reiterate our fair value of SEK10–14.

Q1 review. Q1 sales were cSEK52m (we estimated cSEK60m) and adj. EBITDA was cSEK0.1m (we estimated cSEK1.3m). While sales within Performance Masterbatch were roughly in line with our expectation, sales within Performance Chemical were c25% below our forecast, hit by high inventory levels on the customer side, we believe. On the positive side, sales from DIAB seem to have improved sequentially (see p4). The gross margin was also strong at 42.2% (c160bp above our estimate), driven by lower raw materials costs. The company believes the margin could improve further as raw materials prices seem to be dropping.

Financial position. Nexam obtained an extension of its overdraft facility to SEK20m (previously 11.5m). We consider this positive, as it should lower the risk that the company would need to raise capital through a rights issue. Cash flow was also strong in the quarter (supported by a working capital release of cSEK11m), and the cash position improved to cSEK28m from cSEK23m at end-2022.

Reactive Recycling. The Reactive Recycling business seems to be on track and the company says it has more than 25 ongoing projects that have passed the sample testing stage. Five of these projects seem to be completed from Nexam's perspective, but it is still waiting for its customers to sell them. The visibility of how much volume the Reactive Recycling business could bring is still low, but management says it has the potential to reach cSEK100m in a not-too distant future (although not in 2023).

Fair value of SEK10–14 reiterated. We have lowered our 2023e sales by 4% following the Q1 report and reduced our adj. EBITDA to SEK12m (somewhat offset by a higher gross margin assumption for 2023).

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Hanna Lindbo | DNB Markets | Equity Research Sweden
Email: [email protected]