1. UK Chemicals Industry Landscape

The Chemicals Industry comprised of companies which are focused on the production of 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. The UK’s chemical industry was a world leader in the past. Furthermore, the UK chemicals industry represented approximately 6.8% of the total UK manufacturing industry. Some of the most prominent players listed on LSE are Croda International, Johnson Matthey and Victrex.

The chemicals industry revenue in the UK was 62.8 billion euros in 2019. The chemicals sectors’ contribution was £18 billion in the annual value added to the UK economy. As per the CIA reports, the North-West part of England is the leading geography in terms of chemicals production as it worth around £10 billion. 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.

Meanwhile, international trade is an integral part of the industry; thus, currency fluctuation can lead to high revenue volatility. As crude oil is a primary input, movements in the world price of crude oil have also impacted the industry performance. The UK chemicals sector 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. 

Growth catalysts in the Chemicals Sector

Risk Exposures to the Chemicals Sector

• Environmental Impact – The failure to adopt or apply ethical standards and environmental compliance can contribute to climate change. The chemicals industry is already one of the most regulated industries, and the regulatory environment is becoming more complex. It requires a constant audit of the chemicals manufacturing facilities.
• Health & Safety – The sector uses and manufactures hazardous chemicals, and any mishandling, leakage or accident can lead to injury or death at the chemical manufacturing plant. There needs to be a proper supply chain integration, and stringent safety measures need to be put in place to prevent incidents.
• Government Regulations – Changes in regulations in the chemicals industry can affect the business environment. The regulatory norms drafted by the government keeps on changing, and thus, it is important to work in line with the regulations set by the government, and it could result in additional cost. In any event, where the chemicals sector is unable to adhere to the government laws, hefty fines could be imposed.

SWOT Analysis

Benchmark Index Performance

Based on the last year performance, the FTSE All-Share Chemicals index has outperformed the FTSE 100 index and FTSE 250 index. Furthermore, the FTSE All-Share Chemicals index generated a return of about 42.59%; however, the FTSE 100 generated a return of around 9.62%, and the FTSE 250 index produced a return of about 26.24%. 

Figure 1: One Year Benchmark Index Performance

 (Analysis done by Kalkine Group)

Chemicals Sector Outlook

The chemicals sector of the UK is very diverse, and it is very critical for the economy, including the manufacture of commodity/ bulk chemicals, specialty chemicals, polymers, and consumer chemicals. The chemical sector in the UK includes small and medium enterprises and microbusinesses, which make more than 90% of the sector, and it has a handful of multinational companies. As per the recently available data from the industry expert, the chemicals industry in the UK is anticipated to increase at a CAGR of around 1.9% between 2019 and 2025. Furthermore, the consumer chemicals industry was expected to least impacted by the Covid-19 pandemic due to the substantial demand for soap and detergents even during the pandemic. Thus, the consumer chemical industry was expected show a marginal reduction of around 1.5% in 2020, due to the outbreak. As the chemicals sector moves into 2021, the changed economic, social, environmental, and political expectations are expected to play an integral part in shaping the future.

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

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

A. Essentra PLC (LON: ESNT)

(Recommendation: Buy, Potential Upside: 26.41%, Market Capitalization: GBP 944.28 million)

Essentra PLC is an FTSE 250 listed manufacturer and supplier of caps, plugs, plastic, fibre, and packaging products. Moreover, the Company operates through three business segments – components, pipe protection technologies and security business.

ESNT had paid a final dividend of 3.30 pence per share on 01 June 2021, while the ex-dividend date was 22 April 2021.

                                                                                                                                                                      

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 26.41% over the closing price of GBX 313.00 (as of 08 June 2021).

B.  Zotefoams PLC (LON: ZTF)

(Recommendation: Speculative Buy, Potential Upside: 10.45%, Market Capitalization: GBP 231.44 million)

Zotefoams PLC (LON: ZTF) is an FTSE All-Share listed cellular material technology Company, which focuses on the optimal material solution.

ZTF had paid a final dividend of 4.27 pence per share on 01 June 2021, while the ex-dividend date was 06 May 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.45% over the closing price of GBX 476.00 (as on 08 June 2021). The next important support level on the technical chart is at GBX 456.00.

C. Johnson Matthey PLC (LON: JMAT)

(Recommendation: Hold, Potential Upside: 13.94%, Market Capitalization: GBP 6.19 billion)

Johnson Matthey PLC (LON: JMAT) is an FTSE 100 listed provider of catalyst and catalyst systems to reduce emissions from vehicles and industry. Moreover, it serves customers from automotive, pharmaceutical, and other industrial markets.

JMAT will pay a final dividend of 50.0 pence per share on 03 August 2021, while the ex-dividend date will be 10 June 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 13.94% over the closing price of GBX 3,200.00 (as on 08 June 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 09 June 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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