Umicore long-term share price outperformance versus other metals and mining companies reflects the higher returns generated by its businesses. But make no mistake, Umicore is a cyclical business. The majority of Umicore’s revenue derives from clean technologies– emission control catalysts, materials for rechargeable batteries and photovoltaics, fuel cells and recycling. By far its most economically sensitive business is recycling–recovering precious and other non-ferrous metals from waste streams– accounting for 25% of revenue but 50% of ebit. Recycling has a high cost base and demand for recycled metals depends on spot market metal prices.
Last week the shares rallied along with other Belgian industrials thanks to successful refinancing of the Belgian government deficit. Another reason may be that management are making a good impression during the roadshow and at a conference in the US. Compared to other worried managements of cyclical industrials, Umicore’s have certainly sent some very confident signals to the market in the past six months.
At the H1 2011 stage, management said they are about to publish their best-ever ebit level in 2011. FY2011 guidance is for between 400 – 425M euros, +15% y/y. That compares to the previous best-ever ebit of 360M euros in 2007. After 2007, ebit fell 1.5% in 2008 but then rose 57% in 2009.
Also, Umicore’s share price has performed relatively well in the current economic downturn versus the past. The share price at 31.4 euros today is only 20% lower than its 10-year high whereas in 2008 it plummeted from 34.48 euros in June to 10.35 euros in just six months to November.
Management’s other positive signal is a big share buyback. Since August Umicore has bought 6.5% of its own capital.
The average cost of 1.9 million shares repurchased as of Nov 25th was 29.84 euros. Reasons stated for the share-buyback are: shares are cheap so a good investment, share price appreciation is more attractive tax-wise to shareholders than a super dividend, owning treasury shares is necessary for stock options and perhaps for a future acquisition, and the company is “comfortable” with its balance sheet and can afford a buyback. In fact the buyback is being paid for with free cash flow that otherwise would be used to pay down 350M euros of net debt.
So, given that it is cyclical, could business in 2013 fall off a cliff like it did in 2009? Could the recycling business (by far the most operationally geared division) suddenly weaken? With a reduced breakeven point, management is better prepared for a slowdown than last time. They have also locked in precious metal exposure through the start of 2013. Today, precious metals prices remain above historical averages, so there is an incentive to recycle. The key indicator for the share’s performance will nevertheless remain precious metal price trends and there are some signs of price weakness.
Umicore has generated a remarkably consistent average annual growth in sales of 15-16% across the last cycle and an ROCE of 13-14%. Keeping in mind the surprise of 2009 and that this is not a secular growth story, a PE ratio closer to 9x current year earnings would make Umicore a more compelling ‘buy’ than the actual 11x.