A few interesting trades I'm currently looking at

Solvay spin-off and Atenor rights

Nice beach, blue ocean, Solvay - get it?

Let’s discuss a few trades that I’m currently looking at and that will play out over the next few weeks.

The Solvay spin-off

I'm looking with much interest into the upcoming Solvay split. On December 11, Solvay will split its business in a commoditized chemicals part (maintaining the name Solvay) and a ‘specialty’ chemicals part (to be called Syensqo). I believe the split could unlock significant value as the market seems to greatly underestimate the current SOTP value.

I've written (quite a few times) on the chemicals sector in general, and why it has been suffering over the past few years; you can find comments on my Twitter feed. Sentiment became so bad recently, that pretty much all chemicals companies’ stocks were thrown out of the window. While many companies suffered for good reasons (China double whammy, supply chain issues, bad end-market demand, etc etc), there are quite a few buying opportunities as some are valued like the down cycle will never end. People forget that these are cyclical business, during very bad times.

A good part of Solvay’s business has been hurting, and will continued to hurt in 2024. Looking out a few years and seeing many market trends, the specialty part of the business (Syensqo) might actually become an interesting ‘growth’ company (‘growth’ for a chemical, so to speak).

Syensqo is exposed to big themes like electrification, sustainability (lower fuel consumption, green hydrogen, lighter materials, etc), aging population, etc. The new company will consist of a Materials division (~75% of ebitda at c. 32% margin) and a Consumer & Resources division (at roughly 20% margins).

Growth is expected to accelerate given promising ongoing projects, strong secular market trends and a step up in capex and R&D. There are many other projects that will push growth even after 2028. 2024 will be a relatively tough year, but Syensqo management is confident it will be able to retain strong pricing given good a supply / demand balance in many of its markets.

Management recently presented 2028 guidance where it targets 5-7% revenue growth pa, some ebitda margin expansion and >€3.2 bn free cash flow generation over this period.

The targets would imply c. €650m free cash flow pa on average for Syensqo. That’s a lot! I estimate ~€550m free cash flow for 2024 on roughly €1.7bn ebitda. We’ll see if these targets are reached, but just the exposure to growing markets should be enough to generate some growth.

The current opportunity is the consequence of the cyclical downturn of the cycle, the overall horrible sentiment in the chemicals sector, and the big swings and currently relatively low visibility of Solvay’s earnings generation over the past and the next few years. For Solvay pre-split (hence excl. dyssynergies and various other costs) I estimate c. €2.8bn ebitda for 2024, which makes Solvay currently trading at 5x ev/ebitda. Solvay today is currently valued as an ex-growth crappy business.

Let’s look at valuation in two ways.

I estimate that the legacy Solvay business will generate ~€380m free cash flow next year (way below the implied average €475m pa that the company has guided for over 2024 - 2028). At a 10% yield (I would argue a very conservative valuation), that would result in an implied valuation for Syensqo of <6x 2024e ev/ebitda. Syensqo peers are trading at c. 12-17x. That’s >100% upside, on relatively conservartive cash flow estimates.

Otherwise, on a baseline Syensqo ebitda of €1.7bn for 2024e and 2.0bn net debt (incl. pension and environmental liabilities), a conservative forward multiple of 9x results in €13.3bn equity value, higher than Solvay's current market cap, pre-split.

I believe that the current market circumstances and poor sentiment are providing us with a very interesting entry point in what will be a strongly cash generative company, with increased focus, exposed to secular growth trends, a strong innovation pipeline and a management that has a good track record of cost efficiency.

Atenor rights

The second trade is Atenor, and will require less time to explain. I’ve written up crappy Atenor before as a short. Since then, the shares are down roughly -75%.

As expected, the combination of a very high debt load, rising rates and challenging end-markets has not been good for the company. Atenor is in dire need for cash in order to survive, and is currently doing a rights offering to raise roughly €160m (current market cap €56m). A few large investors already subscribed for a big chunk.

The terms are as follows: 3 rights to purchase 13 shares at an issue price of €5 per share. The rights are currently trading at €0.30 (implying ~€0.07 per share), and Atenor’s share price is €6.30. Subscription is possible up to and including 27 November.

While volatile, Atenor’s share price has been trading in the €6-8 range for some weeks now. I’m keeping an eye on this over next week, to see if there’s pressure on the share price, but this might turn out to be an interesting trade.

Link to the prospectus is here.

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