1. UK Chemical Industry Landscape

The UK Chemical Industry is an integral part of the main manufacturing industry, and it is comprised of companies that are focused on the production of the industrial chemicals. Basically, it converts raw materials into more than 70,000 products. Moreover, the products manufactured by the industry can be classified into three broader categories – Basic Chemicals, Specialty Chemicals and Consumer Chemicals. Furthermore, the products & technologies of the Chemical industry are used in medicines, food & drink, telecommunications, energy-saving, I.T, clothing and much more. Overall, the industry provides employment to around 500,000 people in the country.

The UK’s chemical industry was a world leader in the past. Furthermore, the UK Chemical industry represented approximately 6.8% of the total UK manufacturing industry. Around 21% of the UK chemical industry is in Northwest England. Some of the most prominent players listed on LSE are Croda International, Johnson Matthey and Victrex. The industry is largely regulated by the European Chemicals Agency (ECHA) and the Registration, Evaluation, Authorisation and Restriction of Chemicals legislation (REACH). The chemical sector of the UK has created significant job opportunities, and it has attracted huge investments. The UK has a competitive advantage in innovative and high-value products due to its strong research & development base.

Key Trends in the Chemical Sector

Risk Exposures to the Chemical Sector

SWOT Analysis

Benchmark Index Performance

Based on last year performance, the FTSE All-Share Chemicals index has outperformed the FTSE 100 and the FTSE 250 index. The FTSE All-Share Chemicals index generated a return of about 52.79%; however, the FTSE 100 produced a return of around 20.27%, and FTSE 250 generated a return of around 39.95%

Figure 1: One Year Benchmark Index Performance

  (Source: Refinitiv; Analysis done by Kalkine Group)

 Chemical Sector Outlook

According to the members of the Chemical Industries Association, the industry had witnessed a solid start to 2021. Moreover, around 80% of companies have reported Q1 2021 sales volume to be the same or more than the levels achieved during an equivalent period of the prior year. However, the inflationary pressure on raw materials & freight costs would persist for the near term and continue to cause operational headwinds for the companies operating in the industry. Meanwhile, the changed economic, social, environmental, and political expectations are expected to play an integral part in shaping the future. The chemical sector is crucial in enabling a future hydrogen economy and supporting battery technology & related materials to drive electric vehicle production. The strategic initiatives such as research & development and technology will shape the outlook of the chemical sector in 2021.

2. Investment analysis and stocks under discussion (JMAT, ESNT, CRDA)

After gaining insights into the Chemical sector, we would look at the business model of three Chemical players listed on the London Stock Exchange. 

A. Johnson Matthey PLC (LON: JMAT)

(Recommendation: Buy, Potential Upside: 26.43%, Market Capitalization: GBP 5.17 billion)

Johnson Matthey PLC (LON: JMAT) is an FTSE 100 Index listed company. It is a British multinational Speciality Chemical Company. The group has four operational segments: Health, Clean Air, New Market, and Efficient Natural Resources.

The company will release its Interim results for six months ending 30 September 2021 on 24 November 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                    

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 26.43% over the closing price of GBX 2,670.00 (as of 21 September 2021).

B. Essentra PLC (LON: ESNT)

(Recommendation: Speculative Buy, Potential Upside: 33.34%, Market Capitalization: GBP 787.40 million)

Essentra PLC (LON: ESNT) is an FTSE 250 Index listed essential components and solutions provider. It manufactures and distributes vinyl dip moulded, plastic injection moulded and metal items.

The company will pay an interim dividend of GBX 2.00 per share on 29 October 2021 (Ex-Dividend Date: 23 September 2021).

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 33.34% over the closing price of GBX 261.00 (as on 21 September 2021).

C. Croda International PLC (LON: CRDA)

(Recommendation: Expensive, Potential Downside: 32.37%, Market Capitalization: GBP 12.69 billion)

Croda International PLC (LON: CRDA) is an FTSE 100 index listed diversified Chemical company. It has four operating segments: Life Science, Customer Care, Performance Technologies, and Industrial Chemical.

The company will pay an interim dividend of GBX 43.50 per share on 5 October 2021. (Ex-dividend date: 9 September 2021)

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line remained lower than the signal line, suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 32.37% over the closing price of GBX 9,094.00 (as on 21 September 2021). 

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 22 September 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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