FTSE 250 incumbent Synthomer (LSE: SYNT) went on a great run during the pandemic period. However, it since ran into some problems and the shares and performance dipped sharply.
Some analysts have backed the business and stock to recover. Final results posted last week provide an insight into the firm’s recent efforts.
Has the turnaround begun and is there an opportunity to buy shares now?
What’s happened
Synthomer is a specialty chemicals business and one of the world’s biggest producers of aqueous polymers. These types of polymers have many applications, including latex surgical gloves, building products, paper, adhesives, and more.
As you can imagine, the demand for surgical gloves skyrocketed when the pandemic hit, and the business experienced huge demand, which saw performance and its shares soar.
The business arguably overstretched itself on the back of this new demand. It acquired other businesses, and produced lots of inventory. When demand fell due to the pandemic coming to an end, the business was left with lots of stock, nowhere to sell it, and a business struggling with high debt levels, and a lack of cash on its balance sheet.
Synthomer shares are down a whopping 74% over a 12-month period from 928p at this time last year, to current levels of 234p. Recent volatility hasn’t helped the shares either.
Recent update and future outlook
Let’s break down full-year results posted last week for the year ended 31 December 2023. Starting with the positives, net debt fell by nearly half, from £1.02bn to close to £500m, which is excellent news. In similarly good news, free cash flow increased from £69m to £86m. This will help shore up what was once a dicey looking balance sheet. It looks to me like the firm’s review and change in tack seems to be working.
However, there’s still work to do. Revenues are still falling, and margins seems to have dropped too. Inventory levels are still high, which is a core part of the initial issues, so this is a worry.
Looking forward then, the business is expecting to report pre-tax profits of £63m by 2025. If this happens – but it’s wise to remember that forecasts don’t always come to fruition – the current share price would offer a valuation on a forward price-to-earnings ratio of close to six. That’s very cheap.
Risky but with potential for rewards
I must admit the shoots of positivity, especially regarding the financial position of the business, were impressive.
However, it still seems to be battling with many other aspects it needs to turn around as well as ongoing turbulence. Forecasts always sound great on the surface of things. Let’s see if the business can carry on in a positive vein moving forward.
I reckon Synthomer is a high risk, high reward type of stock right now. It’s the type of stock I sometimes like to buy for my holdings, compared to other stocks with better fundamentals and less problems to overcome.
I’d be willing to buy Synthomer shares when I next have some cash.
