In purely formal terms, Covestro AG is a very young company. On September 1, 2015, the Bayer Group, whose roots go back to 1863, spun off its MaterialScience division. Just over a month later, Covestro made its stock market debut on October 6, 2015. In its first seven years as an independent company, the plastics group has experienced ups and downs. In 2017, Covestro posted record results, with operating margins landing at close to a quarter on sales of more than EUR 14 billion. It is true that Covestro was able to make further gains on the revenue side in 2018. In terms of profitability, however, the 2017 figure remains the benchmark to date. In the current year, analysts even expect the Ebitda margin to shrink to 10.5% (see chart). Which shows how strongly the gloomy macroeconomic environment is impacting the polymer materials manufacturer.
Back in May, CEO Markus Steilemann had to lower the earnings forecast for 2022. In addition to the corona lockdown in China, he justified this step with the sharp rise in energy and raw material costs as well as weakening economic growth. While the pandemic situation in the Middle Kingdom has eased in the meantime, the situation on the cost side came to a head once again. As the global economy continued to lose momentum at the same time, Steilemann was forced to issue another profit warning at the end of July. He now only expects an operating result (Ebidta level) of between EUR 1.7 billion and EUR 2.2 billion. Originally, Covestro had expected an operating result of up to EUR 3 billion in 2022. A few days after the new forecast adjustment, the company presented its interim report: In the second quarter of 2022, management succeeded in passing on a considerable portion of the cost increase to customers via price increases. However, sales volumes declined moderately, particularly in the automotive as well as electrical industries. All in all, Covestro reported an Ebitda decline of one-third on sales that increased by almost 18%.
continued its downward trend following the presentation of the figures. In addition to general recessionary concerns, the cyclical chemicals stock is being hampered by the threat of energy bottlenecks. Particularly at its German sites, which account for around a quarter of global production capacity, Covestro can no longer rely on a secure gas supply. Management is trying to reduce consumption in the short term. For example, steam generation is being switched to oil-based generators. However, according to the company, this can only replace a single-digit percentage of total gas demand. "If gas supply rationing occurs later in the year, this could result in partial load operation or a complete shutdown of individual Covestro production plants, depending on the level of the cut," the group explains in a media release. All the more reason for the CEO to focus on renewable energy sources in the long term. "The transformation to a sustainable and fossil-free industrial landscape is inevitable," Markus Steilemann emphasized in the context of the latest reporting.
Covestro shares have been trying to bottom out in the area of just under EUR 30 for several weeks. Despite the hesitant stabilization, the German large cap shows comparatively high volatility. The combination of chart consolidation and a handsome price volatility makes Covestro an interesting underlying for yield enhancement products. Leonteq has launched several softcallable barrier reverse convertibles, each with a maturity of one year. As a single-underlying, Covestro comes with a guaranteed coupon payment of 15% p.a. in the product currency CHF. In the EUR-denominated counterpart, the quarterly payout is 100 basis points p.a. higher. Both variants have a barrier of 55% of the initial fixing. Leonteq also places the protection threshold at this price level for a new multi-BRC. Covestro forms the underlying together with the Swiss chemical stocks Clariant and EMS. The coupon on this CHF-denominated new issue is 18% p.a.. The following applies to all BRCs: As long as a share falls to or below the barrier, the partial protection expires. In this case, investors are exposed to the full price risk of Covestro (single BRC) or the weakest underlying. Please also note the soft callable feature: Leonteq may call the products quarterly - for the first time after six months - and thereupon redeem them early.
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